Re: Surplus Value or Profit

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

> Of course he does not explain *at this point* how effective
> demand can exceed the factor cost of A, since he has already
> explained that effective demand arises in part from the
> fraction of aggregate income devoted to expenditure, and in
> part from the creation of purchasing power through finance.

Comment:

A brief cursory look through Chs. 1-6 did not reveal any passage in which
Keynes 'explains' that "effective demand arises in part...from the creation
of purchasing power through finance."

However, I found the following passages from Ch. 2 telling for the point at
issue:

"...Contemporary thought is still deeply steeped in the notion that if
people do not spend their money in one way they will spend it in another.
Post-war economists seldom, indeed, succeed in maintaining this standpoint
*consistently*; for their thought to-day is too much permeated with the
contrary tendency and with facts of experience too obviously inconsistent
with their former view.  But they have not drawn sufficiently far-reaching
consequences; and have not revised their fundamental theory.

"In the first instance, these conclusions may have been applied to the kind
of economy in which we actually live by false analogy from some kind of
non-exchange Robinson Crusoe economy, in which the income which individuals
consume or retain as a result of their productive activity is, actually and
exclusively, the output *in specie* of that activity.  But, apart from this,
the conclusion that the *costs* of output are always covered in the
aggregate by the sale-proceeds resulting from demand, has great
plausibility, because it is difficult to distinguish it from another,
similar-looking proposition which is indubitable, namely that the income
derived in the aggregate by all the elements in the community concerned in a
productive activity necessarily has a value exactly equal to the *value* of
the output."

I fail to see how this *indubitable* proposition can be squared with the
notion that "the creation of purchasing power through finance" is part of
Keynes's core thesis.

In turn, my view thereof would seem to accord with that of Hayek who wrote
of the Keynesian Revolution, inter alia, as follows:

"Indeed some of the most orthodox disciples of Keynes appear consistently to
have thrown over-board all the traditional theory of price determination and
of distribution, all that used to be the backbone of economic theory, and in
consequence, in my opinion, to have ceased to understand any economics.

"It is easy to see how such belief, according to which the creation of
additional money will lead to the creation of a corresponding amount of
goods, was bound to lead to a revival of the more naive inflationist
fallacies which we thought economics had once and for all exterminated.  And
I have little doubt that we owe much of the post-war inflation to the great
influence of such over-simplified Keynesianism.  Not that Keynes himself
would have approved of this.  Indeed, I am fairly certain that if he had
lived he would in that period have been one of the most determined fighters
against inflation.  About the last time I saw him, a few weeks before his
death, he more or less plainly told me so.  As his remark on that occasion
is illuminating in other respects, it is worth reporting.  I had asked him
whether he was not getting alarmed about the use to which some of his
disciples were putting his theories.  His reply was that these theories had
been greatly needed in the 1930s, but if these theories should ever become
harmful, I could be assured that he would quickly bring about a change in
public opinion.  What I blame him for is that he had called such a tract for
the times the *General Theory*."

The concluding part of Hayek's comments would later be mirrored in John
Hicks' retrospective look at the Keynesian Revolution published, as I recall
it, in Econometrica (1973) - we should never forget, Hicks cautioned, that
Keynes cast himself in the role of a Prophet in the troubled times of the
1930s.

Hence my statement the other day that the cause of economic science is not
served by according the General Theory the status of Holy Writ.

Gunnar


----- Original Message -----
From: "Bruce McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, November 23, 2001 10:02 PM
Subject: Re: Surplus Value or Profit


> At 19:31 23/11/01 -0500, Gunnar Tómasson
> <gunnar.tomasson@xxxxxxxxxxx> wrote:
>
> [Quot I]:
> >> It seems to me that the logical inconsistencies that you detect
> >> are likely to vanish if you would abandon the effort to modify
> >> the general theory to introduce a surplus value of profit theory
> >> of profit ... because that particular modification seems to be
> >> the source of the inconsistencies that you detect.
>
> >> IOW, its seems highly likely that you are actually finding
> >> logical inconsistencies, but that's a rabbit you are putting
> >> into the hat yourself.
>
> >Consider the following two passages in Ch. 6:
>
> >First.
> >"The amount paid out by the entrepreneur to the other factors
> >of production in return for their services, which from their
> >point of view is their income, we will call the *factor cost* of
> >A.  The sum of the factor cost F and the user cost U we shall
> >call the *prime cost* of the output A.
>
> >"We can then define the *income* of the entrepreneur as being
> >the excess of the value of his finished output sold during the
> >period over his prime cost."
>
> >Second.
> >"Furthermore, the *effective demand* is simply the aggregate
> >income (or proceeds) which the entrepreneurs expect to receive,
> >inclusive of the incomes which they will hand on to the other
> >factors of production, from the amount of current employment
> >which they decide to give."
>
> >At issue is what purports to be a *General Theory* - while Keynes
> >does NOT explain how, in principle, *effective demand* can exceed
> >the *factor cost* of A for any given "amount of current employment
> >which [entrepreneurs] decide to give," yet he reasons AS IF it is
> >not problematic how the 'surplus value or profit' rabbit can be
> >pulled out of the hat.
>
> Of course he does not explain *at this point* how effective
> demand can exceed the factor cost of A, since he has already
> explained that effective demand arises in part from the
> fraction of aggregate income devoted to expenditure, and in
> part from the creation of purchasing power through finance.
> Since it is already clear that only secondary effective
> demand is constrained by aggregate income (including both
> income to entrepreneurs as well as outlays of entrepreneurs
> on other factor incomes), and that primary effective demand
> is not constrained by aggregate income, there is no need to
> explain how effective demand can exceed factor cost.
>
>
> Virtually,
>
> Bruce McFarling, Shortland, NSW
> ecbm@xxxxxxxxxxxxxxxxxxx
>
>