Re: OPEC & Oil Prices

[Basil Moore <bmoore@xxxxxxxxxxxxxxxxx>]

Paul
I found the story on Haberler very interesting, but do not see the
connection with, "savings are the accounting record of investment"?

Profits are of course a residual, as eveyone acknowledges. And I agree that
 the fact that they are received only after all other costs have been paid
gives them a rent-like quality. But surely Marshall was correct. If
positive ("normal") profits are not expected, no one will supply capital?
(Even though I am opposed to the concept of "normal" anything, this seems
to be a place where it makes sense, and I don't know how to do without it?)

I also agree that this cannot be shown by comparative static equilibrium
analysis. But this is one of the reasons I am opposed to equiibrium
analysis: it hides the passage of time.

You seem to have some very 'deep' objection to what I regard as a mere
accounting identity, S=I?

My main objection is to the mainstream view that the amount of saving in an
economy can be viewed as a result of its thriftiness, i.e. that saving is a
volitional behavioural decision, e.g. Solow's growth model. An individual
agent can decide how much she wants to save. But collectively, total saving
for an economy must necessarily equal total investment. Change the
definition of investment, and you change the amount of saving. We have here
the classic fallacy of composition?
Basil


At 10:31 AM 3/14/00 -0500, you wrote:
>At 02:07 PM 03/13/2000 , Gunnar wrote:
>>Paul:
>>
>>Let me preface my comments below by mentioning that, when my old teacher
>>Gottfried Haberler invited me to lunch in Washingtgon in 1978 to discuss a
>>working note on certain theoretical points which I had sent to him at AEI,
>>his very first question was:  "Is profit part of income in your scheme?"
>>
>>"No!", I replied - and Haberler raised some other points.
>
>
>The point that was troubling Hablerer -- and is usually ignored by most
>economists using a flow of funds analysis-- is that all factor incomes
>except capital is determined by money contracts BEFORE production begins --
>and hence has to be financed by the entrepreneur -- while factor capital
>income is the residual paid out after sales revenue is received (and hence
>ex post might be positive or negative). Thus, unless one invokes Marshall's
>supply price analysis -- where factor capital" income is equal to the
>[expected] amount necessary to induce the effort to organize production --
>the capital income" looks a lot like Ricardian rent and therefore is not
>income determining -- but instead determined ex post [Accordingly, Habeler
>was infected with a myopia similar to Basil Moore's insisting that Savings
>is the accounting record of investment. Hence one has to fee oneself from
>the myopia induced ex post accounting records to understand the "origin" of
>profits" -- and where these "profits" are ultimately financed since
>conceptually they are not part of the contractual obligations entrepreneurs
>undertake in organizing production activities.]
>
>A former student of mine, Andrea Twerzi, has worked on this problem -- see
>his article on "The independence of Finance from Savings: Flow of Funds
>interpretation" in the JPKE, vol. 9, Winter 1986-87.
>
> >The importance of the conceptual point at issue is high-lighted by the
>>"capital costs" aspect of OPEC Oil Production Costs in the early 1970s
>>addressed in the following:
>>
>>
>>As an expert witness in some antitrust cases filled
>> > against ARAMCO (the oil company that produced oil in Saudi Arabia in the
>> > 1970s),  the plaintiff's lawyers were able to obtain confidential
>> > information on each well in Saudi Arabia and the cost of production plus
>> > estimates for still unexploited fields.  The public price of 10 cents per
>> > barrel for crude was a generous overestimate of actual costs including
>> > capital costs/.
>
>Here I was using capital costs as the term for gross depreciation of
>exploration and development costs per barrel reserves plus an interest
>charge on the sum so invested.
>
>The trouble with the circular flow argument is that it has difficulty
>explaining increasing circular flow -- or even more importantly decreasing
>circular flow-- Yet, gross accounting profits will be strongly affected by
>this! Gunnar's following sentence suggests what I mean. Gunnar writes:
>
>
>>In other words, NET PROFIT is always and necessarily ZERO in the absence of
>>what, for sake of brevity, I have termed FINAL DEMAND INFLATION by means of
>>NEW CREDIT CREATION in one form or another.
>>
>>The flip side of this ANALYTICAL proposition translated into Keynes'
>>analysis of the "banana economy" in 'Treatise on Money', where a
>>"successful" savings campaign would drive equilibrium employment and output
>>to zero.
>
>
>Here is the tie to Moore.
>
>>In the General Theory, Keynes did NOT resolve the logical conundrum
>>involved - instead, he finessed it by making believe that, absent
>>entrepreneurial miscalculation, EXPECTED PROFITS could be anything other
>>than zero in the aggregate.
>
>No he permitted to be equal to, less than, or more than zero.  See Chapter
>16 of the GT.
>
>>Now, of course, it will most likely be next to impossible to find an
>>economic theorist of mainstream-monetarist-PKT persuasion who could explain
>>what Schumpeter was talking about when he wrote in Preface to the 1934
>>English version of 'The Theory of Economic Development' as follows:
>>
>>"I have not been able to convince myself, for example, that such questions
>>as the source of interest [on production credit - insert GT] are either
>>unimportant or uninteresting.  They could be made so, at all events, only by
>>the fault of the author."
>
>
>To bad Schumpeter could not read Terzi's Ph. D. dissertation --).
>
>>And how does all this relate to the "capital-costs" aspect of OPEC Oil
>>Production Costs in the early 1970s?
>>
>>Briefly, IF Aramco had cashed in and sold its oil-producing facilities in
>>Saudi Arabia to investors at a price that reflected the "mark-up over
>>full-costs-production costs" - or re-valued production assets carried on its
>>books - THEN the "mark-up" would  had disappeared overnight.
>
>
>All Gunnar is saying is that the present value of expected future profits
>would be capitalized into the sale price and hence would become part of the
>gross depreciation accounting of the buyers.
>
>Paul
>