Re: What if and Why of Zero Taxation

["John O'Donnell" <jackodonnell@xxxxxxx>]

Kazuhiro Kurose wrote:

<<SNIP>>

> Investment should be assumed as the function of aggregate
> demand,Y, instead of interest rate,r.That is to say,  I=I(Y).                (1)
> And if the consumption is traditionally assumed as the
> function of income, the consumption function follows that
> C=C(Y).            (2)
> Therefore, the effective demand is
> Y=C(Y)+I(Y).            (3)

This is what gives economist's use of mathematics such a bad
reputation. Although it is useful to recognize causal
relationships, expressing those relationships as
mathematical certainties is nothing short of
misrepresentation. In this particular case it is sufficient
to recognize that investment is a function of expected
profits and profits may be affected by interest rates.

Because the cost of money is OFTEN [i.e. -- not always, such
as when no loan is involved in an investment] an expense
that reduces profits, profits can be expected to be better
the lower the cost of money. However, this is NOT to say
that investment is, or is even likely to be, a function of
interest rates.

Interest rates could simply be low because the prospects for
investment are low thereby reducing the demand for money
which in turn reduces interest rates. Also, the negative
effect of interest rates on profits would likely be true
only in the event of an increase in interest rates AFTER an
investment is made as it is reasonable to expect that only
investments that are expected to make more than the expected
cost of money would be made in the first place. An
investment made because of artificially restrained interest
rates is as likely to be a malinvestment of resources as it
is to be a positive contributer to economic results.

Therefore equations (1), (2) and (3) are not equations at
all, just misrepresentations of one potential expense that
might or might not reduce profits.

--
			-- jbod

		Tax Privilege, Not People
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