Re: A Question about Fundamentals

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

This relates to some earlier discussions with Keith.  I am putting together
some rudimentary notes in preparation of on outline for a short paper
on Douglas' A + B theorem, which hopefully can be the basis of an informed
discussion on the matter at some point in the future.  See the attachment.

Specifically as to your question:  Which came first, money or accounting?

Logically this is equivalent to the question:  Which came first, the
chicken or the egg?

They are both elements - together with many other elements - of an evolving
dynamic process.

So the answer is, if I am forced to make one, neither.



--
William B. Ryan
william_b_ryan@xxxxxxxxxx - email
voicemail/fax - 1-866-678-3967 - toll free



---- "John D. McRuer" <mcruer@xxxxxxxxxx> wrote:
> Bill,
> I need to thank you for your input and your patience. I still have
> a lot of
> questions and your responces have been very helpful. What lies behind
> my
> issues is a process model of the economy (stock-flow) that doesn't
> make any
> specific reference to money. Sooner or later we are going to have to
> make
> some kind of resolution between our physical world and the economists'
> world
> of money. If this should be successful both us and the economists should
> end
> up converging on the same place. You have probably guessed that I have
> answers of my own to my questions, but your answers, while not inconsistent
> consistent with mine, have produced some important surprises. I plan
> to
> produce a summary of our exchange with a commentary. First, however,
> there
> are some more threads to explore.
>
> I don't know how long you want to continue this exchange, but here
> is my
> next question:
>
> Historically, which came first, money or accounting?
>
> Cheers,
>
> = John
>
>
> ------------------------------
> John D. McRuer
> RR #1
> Wellesley, ON
> N0B 2T0
> Canada
>
> (519) 656-2570
>
>
> ----------
> >From: "William B. Ryan" <william_b_ryan@xxxxxxxxxx>
> >To: "John D. McRuer" <mcruer@xxxxxxxxxx>
> >Subject: Re: A Question about Fundamentals
> >Date: Fri, Jul 12, 2002, 14:04
> >
> <S N I P>
> >
> > Well, credit in a checking account has numbers assigned to it.  We
> assign
> > numbers to mass, time, energy, and space that relate them together.
> > The difference is that credit represents social relationships with
> a
> > time dimension, and mass, time, energy space represent physical relationships.
>
>


--
William B. Ryan
william_b_ryan@xxxxxxxxxx - email
voicemail/fax - 1-866-678-3967 - toll free



---- "John D. McRuer" <mcruer@xxxxxxxxxx> wrote:
> Bill,
> I need to thank you for your input and your patience. I still have
> a lot of
> questions and your responces have been very helpful. What lies behind
> my
> issues is a process model of the economy (stock-flow) that doesn't
> make any
> specific reference to money. Sooner or later we are going to have to
> make
> some kind of resolution between our physical world and the economists'
> world
> of money. If this should be successful both us and the economists should
> end
> up converging on the same place. You have probably guessed that I have
> answers of my own to my questions, but your answers, while not inconsistent
> consistent with mine, have produced some important surprises. I plan
> to
> produce a summary of our exchange with a commentary. First, however,
> there
> are some more threads to explore.
>
> I don't know how long you want to continue this exchange, but here
> is my
> next question:
>
> Historically, which came first, money or accounting?
>
> Cheers,
>
> = John
>
>
> ------------------------------
> John D. McRuer
> RR #1
> Wellesley, ON
> N0B 2T0
> Canada
>
> (519) 656-2570
>
>
> ----------
> >From: "William B. Ryan" <william_b_ryan@xxxxxxxxxx>
> >To: "John D. McRuer" <mcruer@xxxxxxxxxx>
> >Subject: Re: A Question about Fundamentals
> >Date: Fri, Jul 12, 2002, 14:04
> >
> <S N I P>
> >
> > Well, credit in a checking account has numbers assigned to it.  We
> assign
> > numbers to mass, time, energy, and space that relate them together.
> > The difference is that credit represents social relationships with
> a
> > time dimension, and mass, time, energy space represent physical relationships.
>
>

Title: The ratio of B is increasing to A

Rudimentary notes:

 

The ratio of B is increasing to A.

 

(More and more is being paid by firms to firms proportionately, and less and less is being paid to labor.)

 

(A greater and greater proportion of consumer income is therefore becoming delayed in respect to the costs of production, and the portion that is delayed is becoming increasingly delayed.)

 

A = Salaries, Wages and Dividends paid to final consumers by firms.

 

B = Sums paid to firms by firms.

 

A + B = Costs of Production

 

A = A1 + A2.

 

V1 pertains to accumulating account balances held by final consumers.

 

V2 pertains to accumulating account balances held by firms.

 

The ratio of V2 is increasing to V1.

 

The ratio of A2 is increasing to A1.

 

The rate of flow from V2 (A2 paid to consumers) is falling in respect to the rate of flow inputted (B).  One way of expressing this is that each unit inputted in increasingly delayed before reaching the output.  In terms of the production cycle we say that the structure of production is lengthening.

 

Because of this lengthening concomitant to industrialization, purchasing power distributed to final consumers, in the form of wages, salaries and corporate dividends, is falling in respect to the costs of production.

 

By labor displacement we mean that other resources are increasingly augmenting labor, as contributors to the final product, including but not limited to energy.  This is expressed financially through lengthening in the period of production.

 

Various accounting techniques, primarily depreciation, do result in the expense curve falling in respect to the cost curve.  With the lengthening of the period of production, the ratio of costs that are depreciated to costs that are not depreciated and expensed immediately is increasing.  The question that remains to be answered:  Is the fall in the expense curve proportional to the fall in A?  My thinking at this point is that this is very unlikely because there are different determinants for each curve. 

 

The fall in A in respect to the costs of production is due to the lengthening in the period of production.

 

On the other hand, the fall in the expense curve results from various arbitrary accounting techniques.  Some costs are expensed immediately.  The fall results from the fact that some costs are never expensed and some costs are expensed after a delay (depreciation).  It would seem at the very least that the period of depreciation would have to increase without limit to match the continuous lengthening in the period of production.  But costs that are depreciated are depreciated for a definite time limit, i.e. three years, five years, ten years, etc.  Alternately, the ratio of costs that are never expensed to costs that are expensed must increase without limit, which would seem to be incompatible to any conceivable accounting system. [See comment below]

 

I therefore suspect the tendency is for the fall in A1 + A2 to outrun the fall in expense. 

 

This results in a falling rate of profit due to the fact that the reflux from income that is falling in respect to the expensed costs of production, in the long run, cannot exceed income because at some point account balances must become depleted.*

 

This would be marked by exponentially increasing debt (as compared to income and the reflux from income) that is compensated through irrationalities, such as bankruptcy.

 

Entrepreneurs are receiving distorted information from consumers.

 

The result is waste and unrealized potential.

 

Inflation: There are various etiologies consistent to the model.

 

* In the unlikely event of an increasing propensity to consume.  It is much more likely for there to be a decreasing propensity to consume from increasing income, which would be an exacerbating factor.

 

Recognizing that there is directionality through the structure of production is essential to understanding the model.

 

A heuristically useful metaphor is a network of dynamically expanding pipelines in continuous flow.

 

The model is contrasted to the conventional model of circular flow.

 

Comment:  The arbitrary nature of accounting practice should be apparent.  Traditional ?brick and mortar? industries have a great number of costs in acquiring mortgageable assets that can be depreciated.  The rules of accounting do not allow depreciation of the great bulk of the assets being acquired by the ?dotcoms? which are largely in the nature of good will achieved through advertising, assembling teams of software designers, etc.  The real assets being acquired by these firms might by just as real as the assets acquired by the brick and mortars, but are largely unrecognized by accountants.  This creates an incentive for dotcom principals to ?fudge? the numbers to show that their firms are profitable which in their hearts they feel they are.  The fudges are being revealed and traditional accounting rules are being imposed.  Consequently, the plug is being pulled from many firms that are providing real value to the economy.  Much real capital is therefore poured down the drain and is lost forever.