Re: profit, etc.

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

-----original message-----
  13 June 2000
  Gunnar Tomasson
  tomasson@xxxxxxxx
  Re: profit, etc.

  Bill:

  The reference note reads in part as
  follows:

  "In the condition of *expansion*,
  however, B > A2, so that the
  instantaneously measured costs of
  production are > than factor payments,"
  where "B represents the composite of
  disbursements by firms in the aggregate
  into account balances held by firms" and
  A2 is part of "A, bifurcated into A1 and
  A2, [which] is the composite of
  disbursements by firms into account
  balances held by consumers in their role
  as consumers, enabling final
  consumption."

  Also:

  "In *stasis* the following condition
  applies: B = A2, therefore, in this
  special case only, the costs of
  production = factor payments, A1 + A2."
  -----//

  Why should "disbursements" from one
  firm (or Microsoft software
  department) to another firm (or
  Microsoft hardware department) be
  treated as "costs of production" for all
  firms (Microsoft)?

  Gunnar

-------------------///

[reply]

This is a variation of the ubiquitous *Net to Zero* fallacy.  Since
payment is made from one firm to another firm, or from one department
to another department within the same firm, it would seem that the
transactions must "net to zero" in terms of costs that are passed on
to consumers.  After all, everyone's disbursements are someone else's
income.  It's just common sense.

What this way of thinking ignores is the *directionality* of
production, from lower to higher stages in series production, the
highest being the point of sale into final consumption.

The rate-of-flow of the costs of production is A + B.  The
rate-of-flow of purchasing power to final consumers enabling final
consumption is A, which includes salaries, wages and dividends broadly
defined.  A represents payments into account balances held by
consumers.  B represents payments into account balances held by firms.
In an expanding economy, A + B is greater than A yet the statistical
firm books a profit.  In *steady-state*, the rate-of-increase to A
equals the rate-of-increase to A + B, that is to say, the slopes of
their respective curves, when plotted on the same chart, are equal.
See the attached flux-reflux.jpg  Let T1 be the costs of production;
T2 represent sales in reflux; and T3 then is accounting expense,
delayed from T1 through the conventions of double-entry accounting.
T2 minus T3 at TX is the rate of instantaneously measured accumulation
to entrepreneurial profit.

Within the structure of production every B payment is a payment made
to a lower stage of production, creating a cost passed up the
structure to the point of final consumption.

The pool of funds into which B payments are deposited does not
constitute effective demand against final production.

Nor does it need to, assuming steady-state.

william_b_ryan@xxxxxxxxxxx



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