Further Comment on A & B Theorem

I love when you type out an email, accidentally hit the wrong key, and erase it all! #@!!

I agree with what you write in your email, Joe, with one caveat, ceteris paribus (all things being equal).

The A+B theorem, and continuous labour displacement will reduce the profitability of organizations in the long run.  And this in turn will lead to bankruptcies and economic upheaval.  It is possible to maintain profitability with a negative cash flow and vice versa.  In fact, the company I work for has reported a financial loss (negative profit) for two consecutive years while maintaining a positive cash flow and significantly reducing the company's debt.  This was due to depreciation expenses and the significant write down of some assets.  In fact, if it wasn't for the rules of accrual accounting and the pushing out of costs into future time periods, most companies would likely be unable to remain profitable in the long run.  This feature of accrual accounting and its effects on the macro-economy is poorly understood by economists and accountants.

In fact, in Douglas' wireless debate with professor Robertson, Douglas wrote the following:



This is also why I think we need to consider the nature of real costs and their relation to accrual accounting.  We actually "pay" for capital twice because of the fact that accountants think they can defer costs to the future, when in fact, real costs can only exist in the present.  When capital is constructed or produced, the company will most often borrow money from the banks, which increases the money supply, and then distributes this money as income.  This income makes its way to consumers and has the tendency to inflate the price of consumer goods on the market at the time of the construction of said capital.  This is how consumers pay for capital at the time its constructed - the inflation of the price of consumer goods.  The consumer is then asked to pay for it again via depreciation expenses charged to the consumer.  However, $1 income will only defray $1 price.  In other words, we are paying for capital, via depreciation expenses, that was already paid for at the time of its creation.  The idea that costs can be pushed into the future is a financial fallacy, but is important, because it's likely the only way that companies can remain profitable in the long run, and it better matches those financial costs with financial revenues generated from the capital.  The whole crux of the A+B theorem is that consumer goods are consumed at a faster rate than capital goods.

"

It is also clear that the longer the average period over which money is collected in respect

of the creation and destruction of a capital asset (which corresponds to the "life" of an asset),

and the shorter the average period over which money is collected for day-to-day living on the

part of the community (which corresponds to the "life" of consumable goods), the greater will

be the discrepancy between purchasing power and prices.

The former period is the average time in years (N2) taken to make and wear out a capital

asset; it is the time covered by the production and destruction of a cost. Obviously, such a

period will vary greatly according to the nature of the asset, but a fair and usual average is

twenty years.

The latter period is the average time in years (N1) during which the money at the disposal of

the community (total income) circulates from industry to the consumer and back again.

"In Great Britain, for instance, the deposits in the Joint Stock Banks are roughly

£2,000,000,000. In rough figures, the annual clearings of the clearing banks amount to

£40,000,000,000. It seems obvious that the £2,000,000,000 of deposits must circulate twenty

times in a year to produce these clearing-house figures, and that therefore the average rate of

circulation is a little over two and a half weeks. . . . The clearing-house figures just quoted

contain a large number of 'butcher- baker' (second-hand) transactions, and these must be

deducted in estimating circulation rates."*

*C. H. Douglas in “The New and the Old Economics”.

After making the necessary correction for the volume of second-hand transactions and for

payments that do not go through the clearing-house, we may conclude that the average period

22

of circulation of the money spent upon consumable goods is about two months, or one-sixth

of one year.

The effect of the very great disparity between these two rates is as follows:

Let N1 = 1 = number of circulations per year, say 6.

N1

Let N2 = 1 = number of circulations per year, say 1

N2 20

Let A = all disbursements by a manufacturer which create costs

= wages and salaries

Let B = all disbursements by a manufacturer which transfer costs

= payments to other organisations

The manufacturer pays £A per annum into the N1 system, and £B per annum into the N2 n

system.

Disregarding profit, the price of production is £ (A + B) per annum. But to purchase (i.e.to <http://i.e.to/>

cancel the allocated cost of £(A + B)) there is present in the hands of the consumer :-

£(AN1 + BN2) = £ (A + B N2 )

N1

N1

Consequently, the rate of production of price values exceeds the rate at which they can be

cancelled by the purchasing power in the hands of the consumer by an amount proportional to

B (1 – N2 ) = approximately B

N1

This deficit may be made up by the export of goods on credit, by the writing down of goods

on credit, by the writing down of goods below cost, by bankruptcies, and by money

distributed for public works and



charged to debt. But in the main it is represented by



mounting debt."  (C.H. Douglas, "The Monopoly of Credit")




On Wed, Mar 22, 2017 at 9:38 AM,  <This email address is being protected from spambots. You need JavaScript enabled to view it.> wrote:

“The A+B theorem looks at costs, and is not at all concerned with profits.  The theorem itself says that costs generated in a certain period of time are always greater than incomes distributed, and this leads to a "gap" between purchasing power and prices.  The causes of this gap are complex, but " The factor which is probably at the root of the problem is at once more complex and more subtle, and has during the past few years been a matter of acrimonious controversy. On its physical or realistic side it is intimately connected with the replacement of human labour by machine labour."  (The Monopoly of Credit)”
 
Hi Jim,
 
The above is absolutely true in regards to the way the Theorem is worded.  But perhaps it IS concerned with profits, too,  if we look at it deeper.  If it is more an accounting theorem than  an economic one.  The starting point is the bank loan that enables A and B to be paid and recorded as costs.  That loan is issued in expectation that there will be a ‘profit’ from which it can be repaid over time.  The principal sum of that loan is not treated as ‘income’ when received, not will it be treated as ‘expense’ as it’s repaid.  Its repayment is entirely dependent on there being a ‘profit’ in, or over, the future from which to repay it as it comes due.  The actuality of the expectation  that *tommorow’s* earnings will be prospectively greater than *today’s* earnings as a result of *today’s* spending (or investment) enabled by the expansion of credit via the bank loan.   
 
 In the Firm’s books, today’s investment will be expensed against tomorrow’s sales to give an operational profit  (or loss) under the rules and conventions of double entry accrual accounting as utilised in every Firm’s Profit and Loss Account.  
 
In terms of its overall  Cash Flow Statement, however, any same Firm may be in negative territory simultaneously.  Firms in general would have to be in a period of expansion, or there would be no way the overall expansion could be financed.  Firms, again in general,  are actually disbursing  more in ‘cash’ (as a result of the funds received from the bank loan being spent) than is simultaneously being received back in ‘cash’ from the sale of their products.   Yet they’re still ‘profitable’ under the accounting rules.  
 
In reverse, it is quite possible for a Firm to be recording a profit in its Profit and Loss Account, and actually go bankrupt through not being able to collect enough ‘cash’ from its customers to pay its bills as they come due.  It might have too much out on its books in receivables that aren’t being paid in a timely enough manner.  
 
If we look at Douglas’s last sentence above we get to the core of the problem.  The “displacement of labor” and the incomes distributed therefrom.  Those labor incomes, the largest part of A disbursements and receipts, still,  in the whole economy, fall overall with increasing labor displacement and advancing technology.  Those are the ‘costs’ that ‘cost savings measures’ via advancing technology, outsourcing, etc.,  are generally out to deal with.  Yet it is the spending of those incomes at the final ‘consumer’ level that’s necessary to maintain a level of sales necessary to fully liquidate A and B costs and provide the level of  profit necessary to fully liquidate loans as they continually come due.  
 
When incomes fall, spending from those incomes falls, too.  And the level of profit expected  and necessary in the economy as a whole shrinks relative to the expectations of loan repayments it has to be large enough to meet.  Profit is thereby ‘pinched off’ , and if this is widespread enough to cause rising business defaults, the banks tighten up on the issue of further credit.  This, of course, exacerbates the whole situation.  For without that steady flow of credit more businesses are unable to meet their obligations as they fall due.  There are the usual foreclosures, and the economy becomes ever the more centralized and ‘financially’ oriented afterwards.  Often to the verifiable  physical detriments of us all.
 
So ‘profit’, whether politically popular with those on the left side of the current political spectrum, are not only necessary, it is more than likely also necessary that they need to be improved from the present levels they’ve shrunk to.   Or we’re going to see more and more corporate concentration as Firms try to overcome what is a very definite problem by trying, again,  and eventually futilely as in many other instances, to expand its boundaries.  The SC CONSUMER augmentations to earned incomes are clearly the  best answer to enabling this to happen.
 
Joe

 

THAT EVER-INCREASING GAP BETWEEN INCOME AND CONSUM...
Further Discussion on A+B Theorem