PKT message, Re: Surplus Value or Profit

1. Referencing http://csf.colorado.edu/forums/pkt/2001III/msg01040.html

Bruce McFarling writes:

And as we all know, this is not true of Keynes' system, primary effective demand (D1) is generated by financial arrangements that do not depend upon the prior receipt of income...only secondary effective demand (D2) is generated in that way.

This does not appear to be consistent with the General Theory?s chapter three definition:

The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.

?Primary effective demand? and ?secondary effective demand? were not Keynes? terms.

My understanding of what Keynes meant is illustrated through the attached phase diagram.

Let the curve at T1 represent the rate of flow through time of entrepreneurial disbursements to the factors of production. These disbursements are divided between that which is paid to final consumers and that which is paid to entrepreneurs.

That which is paid to entrepreneurs is D2.

That which is paid to consumers?represented by the curve at T2--is not yet D1 for that depends on the consumers ?propensity to consume? out of their income. What they spend on consumption out of their income is D1.

Effective demand at any point in time, more commonly called sales, then, is the instantaneously measured T1 ? T2 + T3.

The amount of ?labour? employed by the entrepreneurs depends on what they expect will be the D1 + D2 in reflux to what they perceive is their spending.

2. Referencing http://www.geocities.com/new_economics/burt-11-14-01.htm

Wes Burt writes:

By "circular three flow model" I have in mind Leontief's 1966 Input/Output tables showing transactions between industries as one flow, transactions between government agencies industries and households as the second flow; plus the speculative flow as shown in my Figures 4, 5, and 6.

This is a summary of Leontief?s approach from a standard text:

We now use a key principle in building the economic model: No sector ?manufactures? money. For each sector, the total value of its inputs (from other industries and primary inputs sectors) exactly matches the total value of its outputs (to other industries and final demand). Note that industries may make profit. But the profit is paid to someone! It goes to small business proprietors, shareholders, etc.

The fact that inputs can equal outputs in dynamic economic systems had already been disproved nearly two decades before Leontief first published. See theorems 1 and 2 in the attachment.

As to ?profit,? it may conceptually be ?owed? to someone but it is not necessarily ?paid? to someone. It therefore does not automatically become a component of effective demand.

I might add that Leontief?s approach requires the axiom of neutral money.

I don?t see how it can be reconciled to any concept of a market economy.

Fundamental Theorems

[1] In a system of continuous flow, let N be a nodality which contains a volume V defined by the dimensions of N. Let the rate of flow of aggregate inputs to N be designated dI/dt. Let aggregate outputs be designated dO/dt. Let the rate of change in V be designated dV/dt. Then dI/dt = dO/dt + dV/dt. Now if N's dimensions are fixed, dV/dt = 0, so that dI/dt = dO/dt. But if N's dimensions are expanding, dI/dt must be > dO/dt, which means that inputs to expanding nodalities must exceed outputs.

[2] Assert axiomatically that in respect of an expanding nodality in a system of continuous flow, the rate of flow of aggregate inputs must exceed outputs. Now let there be one such nodality P with inputs dX/dt and outputs dY/dt. Then configure P in a closed circuit with a second such nodality Q so that the outputs of P are the inputs of Q, and the outputs of Q are the inputs of P. Consistent with the assertion above the following conditions must simultaneously obtain: dX/dt > dY/dt and dY/dt > dX/dt, which is impossible. It is therefore concluded by implication that for such a circuit to function, it must contain within its structural complex a counter-nodality that has outputs greater than inputs.

[3] In respect of financial institutions, let deposits = D, loans etc. = L, cash in hand = C, and capital = K. Then: assets = L + C, liabilities = D + K, so that L + C = D + K. Differentiating with respect to time: dL/dt + dC/dt = dD/dt; K being fixed, dK/dt = 0. Assuming cash in hand is kept constant, dC/dt = 0. Therefore dL/dt = dD/dt, which means that loans create deposits and the repayment of loans cancel deposits.