Re: further reply to Prof. Gunning

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

<**>The lender's wealth has not been reduced unless
the borrower is unable to repay the loan.<**>
--------------------
It has been reduced if the borrower throws the money
into the ocean, as is reflected in the valuation of
the borrower's securities in the secondary market for
notes, stocks and bonds.
--

<**>My claim is that, at the time this transaction is
made (and before B commences to use the borrowings),
both saving and wealth are increased.<**>
--------------------
I invite you to revise this statement.  It appears to
be complete nonsense.  Before anything is done with
the money, both saving and wealth are increased?
--

<**>What we may  disagree about is whether the method
used by the borrower's accountant to record the
transaction is important insofar as one's goal is to
understand the capitalist economy.<**>
--------------------
"The power of double-entry bookkeeping has been
praised by many notable authors throughout history.
In *Wilhelm Meister*, Goethe states: 'What advantage
does he derive from the system of bookkeeping by
double-entry!  It is among the finest inventions of
the human mind.'  Werner Sombart, a German economic
historian, says: '...double-entry bookkeeping is
borne of the same spirit as the system of Galileo and
Newton' and 'Capitalism without double-entry
bookkeeping is simply inconceivable.  They hold
together as form and matter.  And one may indeed
doubt whether capitalism has procured in double-entry
bookkeeping a tool which activates its forces, or
whether double-entry bookkeeping has first given rise
to capitalism out of its own (rational and
systematic) spirit.'"
--

<**>You (all) believe that you are smarter than the
entrepreneurs. This is precisely why your arguments
do not attempt to predict how real entrepreneurs are
likely to react if the policies you propose are
adopted. You assume also that, besides receiving
distorted information, the entrepreneurs are too
stupid to realize that the information is
distorted.<**>
--------------------
Accounting is a technology whereas marginalism is
hypothetical idealism.  In the real world
entrepreneurs use information supplied to them by
their accountants not the practitioners of
marginalism.  Improving the technology of accounting
will only help the entrepreneurial decision making
process.  We maintain that the money and credit
system is part and parcel of that process.

As to the crack about entrepreneurs being too stupid
to realize they are getting distorted information,
entrepreneurs know they are getting distorted
information.  It is the economists not the
entrepreneurs who are too stupid to know the
entrepreneurs are getting distorted information:

"It is common to hear adventurers in the different
channels of industry assert, that their difficulty
lies not in the production, but in the disposal of
commodities; that produce would always be abundant,
if there were but a ready demand, or vent. When the
vent for their commodities is slow, difficult, and
productive of little advantage, they pronounce money
to be scarce; the grand object of their desire is, a
consumption brisk enough to quicken sales and keep up
prices..."

"Adventurers" is the translator's interpretation of
J. B. Say's use of the French word "entrepreneur."

It would appear that Say was calling the
entrepreneurs stupid.  He proceeded to lecture them
on money:  "Wherefore, it is products that you want,
and not money."  Which ignored the fact they needed
money not goods to pay their bills.

"The silver coin you will have received on the sale
of your own products, and given in the purchase of
those of other people, will the next moment execute
the same office between other contracting parties,
and so from one to another to infinity; just as a
public vehicle successively transports objects one
after another."

But if the number of public vehicles remain constant,
it is impossible for them to transport an increasing
quantity of goods per unit time.
--

---original message---
Date:   Sat, 15 Nov 2003 11:52:10 +0800
From:   Pat Gunning <gunning@xxxxxxxxxx>
Subject:   Re: [SOCIAL CREDIT] Social creditors and the Ponzi game

william_b_ryan@xxxxxxxxx wrote:

--------------------
The comment simply pertains to peculiarity in
definition within accounting.  When a firm sells a
bond it books the transaction to debt.  When it sells
a stock it books the transaction to equity.  From the
perspective of social credit analysis, that is debt
masquerading as equity.
--

I was not just commenting on the "masquerade" sentence. You left out the first part of your paragraph. The entire paragaph is as follows

"When the individual saves he is purchasing from his
income something other than goods and services for
his personal consumption.  In the broad model he is
purchasing "investments" which will prospectively
bring him future income.  That future income is
income that is "unearned" as opposed to income that
is "earned."  He isn't saving in any physical sense
nor is the community as a whole saving in any
physical sense.  The relationship is contractual
between creditors and debtors.  It is however true
that much debt will masquerade as equity."

I understand the accounting. My basic point, which was perhaps somewhat obscure, relates to the whole paragraph. It is that you were using the terms "earned" and "unearned" to describe income from investment. And you seemed, with your denial that a capitalist entreprener's loan to a producing entrepreneur is saving, to be denying that this adds anything to wealth. My counterargument is that, on the contrary, so long as the capitalist entrepreneurs who finance the businesses do not systematically make errors, their investment adds to wealth. I think that your distinction between a "contractual relationship" and a "real one" is a non-starter. A vast portion of the production and exchange system in a capitalist economy is built on a pyramid of promises. Some are contractual; others are merely compacts in which the actors have expectations about others' future actions. Your paragraph seems to deny the significance of this "pyramid" and to implicitly suggest that wealth in a capital

ist economy could be just as high if it was absent. I don't know whether you actually believe this. But it seemed to be implied by your paragraph.

--------------------
If the borrowed money is thrown into the ocean the
borrower's wealth has indeed been reduced.  But so
has the lender's.  Normally, the loan is based on the
credit-worthiness of the borrower, which is reduced
if the borrower self-destructs.  The "negotiable"
value of the borrower's note is reduced and will be
so reflected (at any rate it should--a lot of hanky-
panky has gone on recently in the field of
accounting) in the books of the lender or the holder
"in due course."
--

The lender's wealth has not been reduced unless the borrower is unable to repay the loan. But this is a side issue. The main issue concerns what I perceive to be your implication that A's lending to B and A's financing of B's production does not add to saving and wealth. My claim is that, at the time this transaction is made (and before B commences to use the borrowings), both saving and wealth are increased. If, later, B throws the money in the ocean, defrauds the lender or financier by spending it on a holiday in Fiji, or wastes it in his business; saving and wealth fall. I think we agree on this. What we may  disagree about is whether the method used by the borrower's accountant to record the transaction is important insofar as one's goal is to understand the capitalist economy. I think not. Of course, accounting procedures can facilitate fraud. And the accounting procedure may affect the amount of taxes that must be paid. But these are other matters.


<**>Such a complex and intricate network can "break
down," so to speak. The promises are made in terms of
the common medium of exchange.<**>
--------------------
A relatively small percentage of transactions are
conducted with what we usually think of as being
"money."  Our mental image of money is merely the
form of credit we receive in our pay vouchers.  That
is merely the fungible means of final settlement of
contracts that concatenate through time from
production to consumption out of the larger spectrum
of creditary or contractual instruments.  The modern
economy does not require a "medium of exchange."
What it does require is more in the nature of a
ticket or claim check against production at the point
of sale into final consumption.  Without that,
everything stops.
--

I think that this is a fundamental error. But I am uncertain. It seems to deny the importance to the entrepreneur of being able to plan for the future by comparing money flows. What you call "our mental image of money" refers to the money of one subset of people only -- employees. The producing entrepreneurs who hire employees, as well as those who don't hire them and those who finance the producing entrepreneurs, also have mental images of money. It is those images that drive the capitalist economy and cause workers to be hired. Are you neglecting this? I am unsure. But I am sure that your statement is incomplete.

Aside from this, the "mental image of money" that most economists have refers mostly to account balances at banks and other financial institutions. But the image is not definite since there is cash and so-called money substitutes. If you are using a different concept of money you will have trouble communicating with other economists.

--


<**>If someone -- usually a government or central
bank -- messes with the money and causes unexpected
inflation or deflation<**>
--------------------
What do you mean by "messing with the money"?
Presumably from the context it means "unexpectedly"
changing the rate of inflation or deflation.  So you
have no problem with inflation or deflation per se.
Correct?
--


We can build a model of an increase or decrease the quantity of money in which the resulting changes in prices are fully anticipated. That is what I was referring to. In reality, some users of money are bound to be surprised by money-induced inflation or deflation.


<**>The scheme you have in mind messes with the
money. That is why I regard it as dangerous.<**>
--------------------
We propose to "mess" with those who are "messing with
money."  Do you not also propose to "mess" with those
who are "messing with money" by stopping them from
"messing with money"?  You apparently want to keep
inflation or deflation to an "expected" level and
there is no problem with either so long as it is
"expected."  We say both are harmful, period.  But
this does get us back to the definition of
"inflation" in Austrian economics which we do not
share.  You define inflation as any addition to the
quantity of money.  We define it differently.
--

I am using the more popular definitions of inflation and deflation, not the old definition. (Mises argued that the originators of the "inflation = increase in general level of prices" definition aimed to obfuscate by coopting the term. But, even if true, it does not seem to matter very much today.) My point is simply that that if the quantity of money is increased or decreased for any reason, it will disrupt some entrepreneurial calculations. If the central bank deliberately conceals its money-changing actions and is successful at this, the disruption will be greater than if it announces its policies. But the disruption will occur in this case also because information about the central bank's policy is costly to acquire.

--

<**>Entrepreneurs try to earn wealth by capturing
what they believe will be gains from exchange.<**
--------------------
This is fundamentally a false definition of
entrepreneurship.  They do not look for "gains from
exchange" because the modern economy is not primarily
one of exchange of things already produced, but
contract for *future* performance.
--

I did not say "gains from exchange of things already produced." I did not mean this either. Gains from exchange are also expected from the exchange of promises. I suppose that we agree on this.

--

><**>If you cannot tell why your policy is likely to
work by referring to how you think entrepreneurs will
act after the proposed policy is adopted, then
something is wrong either with the theory or with
your ability to articulate it.<**>
--------------------

We say that entrepreneurs are receiving distorted
information (due to a flaw in accounting) that
negatively impacts their judgment preventing the
market from reaching technical efficiency.  A
wonderful analogy is to the calendar (Michael Lane
first suggested this to me).  It is not possible to
construct a perfect calendar, so we periodically
adjust with leap years, leap minutes, etc.  That's
all we propose to do.
--

Indeed. You (all) believe that you are smarter than the entrepreneurs. This is precisely why your arguments do not attempt to predict how real entrepreneurs are likely to react if the policies you propose are adopted. You assume also that, besides receiving distorted information, the entrepreneurs are too stupid to realize that the information is distorted.


--
Pat Gunning, Feng Chia University, Taiwan;
New book: UNDERSTANDING DEMOCRACY http://www.constitution.org/pd/gunning/votehtm/cove&buy.htm
Web pages on Praxeological Economics, Democracy, Taiwan, Ludwig von Mises, Austrian
Economics, and my University Classes; http://www.constitution.org/pd/gunning/welcome.htm
and
http://knight.fcu.edu.tw/~gunning/welcome.htm




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