Re: General Theory Seminar --Savings and Investment

["William B.Ryan" <william_b_ryan@xxxxxxx>]

http://csf.colorado.edu/forums/pkt/2000/msg00848.html
[Harry Veeder]
"There is some confusion here between the consumption of income and
the consumption of purchased goods..."
-----------

I think, correct me if I'm wrong, by Keynesian definitions consumption
is spending on goods intended for final consumption and investment is
spending on capital goods--not their actual utilization.  I don't have
a problem with that, presumably spending correlates to utilization.
Where I have a problem is the syllogism's algebraic identity S = Y - C
and its conclusion that S = I.

Look again at
http://www.geocities.com/CapitolHill/Senate/7018/flux-reflux.jpg
If T1 represents total factor disbursements and T2 consumer spending
in reflux, the difference at TX would be net saving by consumers in
the cash flow sense.  There is no way except by pure chance that could
equal spending for capital goods.  Keynesians then will define Y as
being net factor payments, depicted graphically as T1, PLUS profits.
See http://csf.colorado.edu/forums/pkt/2000/msg00641.html  So there is
income going to consumers and firms.  Evidently there is consumer
consumption and firms consumption.  Consider the case where T1
represents total firms disbursements to consumers and firms, and T2
its reflux as before but from both consumers and firms.  The
difference between simultaneously measured T1 and T2 still represents
accumulation to savings but savings accumulated by both firms and
consumers.  There again is no way the gap between T1 and T2 would
exactly equal spending for capital goods.

Keynesians mix cash-flow concepts with accounting concepts.  The prime
examples are "profits" and "expenses."  See
http://csf.colorado.edu/forums/pkt/2000/msg/00649.html which states
"Profits=Firm Income-net expenses including wages, rent and interest."
But in terms of cash flow in a growing economy in steady-state, the
flux is always greater than its reflux.  In terms of cash flow,
therefore, firms in the aggregate are always receiving from sales in
reflux less than they are disbursing.  They book a profit through the
conventions of accrual accounting, which delays the "expensing" of
certain disbursements into the future.  T1 and T2 represent actual
cash flow streams that are in principle measurable.  T3 is an
accounting "fiction."  Its placement along the time axis is completely
arbitrary.  Accounting profit is the difference between T2,
representing actual sales, and T3.  Therefore profit itself is a
fiction without objective reality.  It is meaningful, to the extent
that there is consistency in the rules of accounting, by providing a
benchmark to judge entrepreneurial productivity.  It also provides a
useful smokescreen to justify exorbitant shareholder dividends and
executive compensation.

But this creates a bias in the system toward disbursements for capital
goods as opposed to human capital, since capital goods can be
depreciated while human capital ordinarily cannot.  Say that an
entrepreneur could increase the productivity of his plant, in terms of
labor hours per unit output, by spending the same amount over the next
six months in either of two ways.  He could purchase a machine tool
which could be expensed over several years, thereby increasing his
ostensible rate of profit.  Or he could invest in better management
techniques, organization and training.  Both the capital good and
improved human capital will depreciate in utility over time if not
maintained.  But only the capital good is depreciable according to the
conventions of accounting.  So there is a bias toward the most energy
consuming and polluting forms of production.

Because it shifts the burden of debt from firms to consumers,
increasing consumer credit also has the effect of raising the
ostensible rate of profit.  But here the rate of profit increases
simply because of shifting debt, not through the improvement of
productivity by any conceivable definition, further eroding the
rationale for laissez-faire.

Bill Ryan
william_b_ryan@xxxxxxx
Internet: http://www.geocities.com/socialcredit



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