Re: Savings fallacy redux (was Re: Method)

["Dr. Bruce McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>]

John Vertegaal <vertegaa@xxxxxxxxx> wrote,

on Fri, 06 Sep 2002 07:27:24 -0700 (PDT):


>   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.


True, but then two points must be considered.  First, the "costs"
in financial terms is information, not matter-energy, and it is
information about the requirements under current institutional
arrangement to *command* resources, not information about the
"real" costs of the order that has been created in matter-energy.

Second, the requirements for stability do not necessarily
impose themselves as immediate constraints.  If the current
position is not stable, but this results in adjustments that
move the system toward greater stability in the cost-recovery
sense, then over the long period it can *look* like a
constraint, but it acts by the system moving towards
a position that is more compatible with stability when
it is in a position that is less compatible with stability.
If the positions compatible with stability move around
in response to a variety of influence, then you have the
kind of restless moving "equilibrium" like a population
equilibrium in biology, instead of the equilibrium of a
mechanical system in a rest state.

>  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.


You have essentially summarised Post Keynesian price
theory, haven't you?  In the short period, variable costs
must be recouped, and over the long period, fixed costs
must be recouped, and in the presence of uncertain and
variable levels of effective demand, that means that the
"core" productive organisations that administer prices
must end up with prices that are _de facto_ mark-ups over
variable costs that are planned to result in sufficient
surplus over variable costs on average to cover fixed
costs with some additional margin for error.

> 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 beingthe "+" as in

 > the above,  there is no notionally uniform rate of

> profit either.


But the observation that there is no ex-ante determinable

"stocks" of capital in value terms IS the Cambridge (UK)
critique of the Cambridge (mass) Samulesonian evisceration
of Keynes' General Theory system.  This is required to
build a macroeconomic system vaguely resembling Keynes'
theory with a micro level that is populated by
neoclassical economics instead of with real world firms.
Indeed, your critique is quite like the critique of
Boulding of Keynesian theory, perhaps because it is
driven by a perspective that shares some features with
Bouldings.  In any event, the fundamental response that
I am making is the same as I would make in response to
Boulding's critique (indeed, the same that I plan to
make in response to Boulding's critique, since the
paper that came out in the summer JPKE was about the
appeal of fundamental aspects of Boulding's MICRO
level shift of perspective from a PK perspective):

Yes, what you say is wrong about "Keynesian" theory
IS wrong about Samuelsonian macroeconomics.  However,
it does not apply to the General Theory system.  The
aspects of the Samuelsonian system that are in conflict
with the valid implications of your argument are not
taken from the General Theory system, but are
modifications and replacements made in order to bring
it into compatibility with a neoclassical microeconomics.


> As I showed before, taxes are not abstracted from in the

> model.   Direct or indirect taxation doesn't matter.

Direct and indirect taxation is equivalent for your
model *because*:

> 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.


In the GT system, the final beneficiaries of disbursed
income must compensate the firms that sell final goods
the amount not already compensated by external finance.

*the stability questions are the same*: the question is,
who decides?  Are the retailers quantity takers or
quantity setters?  If they are quantity takers, then
they cannot specify the nominal value of their activity
over a period.  If they are quantity takers, then
they must make some decisions about the level of
activity in order to be prepared to meet the effective
demand for customers that shows up.  If the effective
demand that does show up is compatible with stability,
then, among other consequences, the proceeds of sales
will be able to satisfy the obligations of retailors
will be refunded.

We have to be very careful when building models of
social systems that we do not lapse into simple
Newtonian causality.  There are material causes
and formal causes and final causes.  Note that
the latter is teleological (and therefore badly
modelled) if it is the final realised state
that is the final cause as opposed to the current
anticipatory models of participants.  A well
constructed model MUST be teleonomic, but
CANNOT be teleological.