Re: Savings fallacy redux (was Re: Method)

[John Vertegaal <vertegaa@xxxxxxxxx>]

Dr. Bruce McFarling wrote in reply to the below:

>>As resources enter the economy a corresponding debt is created;
>>and this debt, embodied in output, is passed on until it reaches
>>the retail level, where bit by bit it can be resolved; thereby,
>>through final demand, determining the "true" value of the
>>supplied economic asset over time.

>Why "true" value?  In the sense of "the one true faith"?
>That is, why is this superior to the normal terminology for this
>amount, which is the market value of goods and services for final
>demand.

The "market value of goods and services for final demand" in a free
market society is elastic by necessity; it's an ex ante assertion
of faith that a particular value will be realized.
The "true" value is ex ante indeterminable.  The difference between
the two would be the amount of "+" value, in "cost+" set and
"cost+" received.

But I think we are on different wave lengths here.  And looking
back on the above, it's no doubt my fault; for my effort to be as
succinct as possible, made it all too abridged to be informative.
  I'm trying to portray a flow of natural resources entering the
economy, that together with earlier resources having been turned
into capital equipment higher up in the economy, are producing
intermediate fixed and variable capital output; which in turn is
used in the production of retail output.

There are costs associated with this flow that need to be resolved,
which in a *stable* system can only take place on the retail level.
  So far I don't think I'm introducing anything new.  The point is
that regardless of price theory, not only the cost of variable but
also that of fixed capital needs to be recouped; and is thus passed
on for an eventual resolution on the retail level.  So that the
*determination* of the value of fixed capital throughout the entire
economy takes place on the retail level too.  There are no ex ante
determinable "stocks"; nor is there a "multiplier", like the one
envisaged by Kahn.  And with the ultimate economic variable being
the "+" as in the above, there is no notionally uniform rate of
profit either.
  While at first blush this may all seem rather silly and perhaps
useless, it does logically follow from only a couple of very basic
axioms that I have often stated in the past.

Another way of looking at our communication problem is that our
modes of thinking are so different.  You think in terms of a build
up of values (positive thingies that can be depleted over time),
while I think in terms of a debt that needs to be resolved so that
reproduction can continue.  Perhaps one could say that we project
our models onto different geometric quadrants.

On the other hand however, in my model it doesn't make a difference
whether capital goods are fully written off and free and clear of
financial encumbrances, or not; since the retail sector has to
subsume costs (including all taxes) and profits made higher up,
regardless of their distribution and thus has go into debt any way.
  The only thing important to retailers (and to the economy as a
whole also), is that the final beneficiaries of the disbursed
income higher up and on their own level, do turn around and
compensate them for their expenditures.

Thus an economy that is experiencing (an increase in) interest
rates requires the final beneficiaries of interest income to
consume their (added) share of embodied costs; ditto for tax
beneficiaries and for profit income earners (or their proxies).
The model makes it immediately clear that "golden age" conditions,
given a livable state of development, are rooted in (proportional)
consumption alone; the latter isn't 2/3's of the economy (as is so
often expressed), it determines the health of the entire economy.

And finally, this model can also put the benefits of growth into
perspective.  One of its conclusions is that at our existing level
of development, the "attempt" at growth is costing probably around
20% of the pie, while its result is less than 2%.  Given that it's
not out of the question that the latter is entirely due to "having
learned from experience"; "having to invest!" only benefits the
financial sector and nobody else.  The replacement of worn-out
capital at ever greater productivity rates, can easily be financed
by depreciation allowances on current capital values; and thus
allow those employed at capital goods manufacturing, a share of
current retail output.


>>This is very different from a resolution of income, disbursed
>>to economic agents during a particular period, through
>>expenditures of either kind.  Or: Y1=C1+I1 and its various
>>consequent derivations such as you showed.

>The resolution of value added and income *disbursement* may be
>quite distinctive things.  However, the value added at each
>stage in the process that you describe is the same as the
>earned income at each stage.  Which means the earned income
>generated by passing through the stages would be identical
>to the final "true" value (barring indirect taxes along the
>way).

As I showed before, taxes are not abstracted from in the model.
Direct or indirect taxation doesn't matter.  The latter is paid for
from disbursed income and both need to be passed on as costs to a
lower level.


>Further, the final "true" value represents a payment.

At this point it became clear to me that we were misunderstanding
each other and I had to rewrite much of the above.  For the "true"
value above was in reference to the piecemeal determination of
capital asset values existing to a large extent higher up in the
economy, and not (in spite of being determined at the same time)
the "true" value of the final product.


>Where did those payments come from?

>From currently disbursed income, same as in your model.
The difference is that by taking retail output off the market, the
occurring resolution involves the (partly long ago disbursed)
income embodied in the product.  The economy of this model is still
deeply in debt at least to the tune of unresolved capital, and thus
quite far from a static equilibration.


>Each business in those stages of production only produced in
>expectation of being able to sell at a level that would at least
>recoup expenses, and hopefully provide a surplus as well. It
>certainly is not the existence of the resource that drives
>it into the productive process that you described ... it is
>the expectation of return at the end of the current stage
>that draws it into the current stage.

This is in full accordance with my model, except that it can also
unequivocally pinpoint the source of the "surplus".


>So what are you proposing to replace effective demand as a focus
>for business expectations?

No need to replace it.  I fully agree with it.


>So far much of what you say would serve as a critique of the
>sad parody of Keynes model that shows up in macroeconomic
>textbooks, but I still don't see the purchase that it has
>on the GT itself.

Still?  The critical difference lies in when and how determination
of financial assets occurs.  My concern is that the obligations (or
financial assets) incurred at the beginning of the flow, should be
considered debts as long as its corresponding real output about to
make an appearance on the retail level, requires retailers to go
into debt before a return can be realized; in other words, during
its full lifetime of production.  This is much more than just a
semantic difference.  Keynes determines assets exogenously, which
is not necessarily wrong but it does add an axiom; and with it he
takes a chance that his model becomes overdetermined.

I think I've shown this to be the case, in that by far the greater
portion of financial "assets" is bogus with respect to being able
to pursue the final goal of the economy, which is to provide us our
standard of living; and that the institutional set-up and con game
of enticing economic agents to hold bogus assets, deprives the real
economy from determination, thus inducing involuntary unemployment.
  Even though that is also the main concern of the GT, all in all
I think it falls just a bit short in its explanation; and I doubt
that it can be fixed.  Whether my model is more appropriate, dead
wrong, or needs to be revised too, perhaps time will tell.

John V