Further Discussion on A+B Theorem

it is more an accounting theorem than an economic one
On Tue, Mar 21, 2017 at 2:40 PM, C…. L…. wrote:
The A+B theorem, at its core is essentially the same problem that Marx struggled with. How can an employer make money if the cost of the product is equal to the cost of labour? In order for the corporation to be profitable, they have to charge more than the labour cost in order to produce a profit. Douglas extended this to the entire economy, and that’s where his arguments come from.

Response Hi C…..:
Actually, while there are some similarities between Marx’s analysis and that of Douglas (how capital and control of it direct the economy), there are some rather big differences as well.

Marx believed in the labour theory of value, and assumed that the reason that consumers cannot pay the price of articles is that the price is labour + profit, and because profit is not distributed to consumers, they cannot buy back production.  This is the 10 will not pay for 11 fallacy, and is essentially the same argument that many monetary reformers use when condemning interest on loans. 
This analysis does not take into account two things: 
1) profits are distributed as income in the form of dividends,
2) the economy is a continuous flow, so dividends are being distributed to consumers all the time.

Douglas did not believe in the labour theory of value, and like many classical economists believed that land, labour and capital were all factors in production, but Douglas added a fourth:  our cultural heritage, and he believed this was the most important factor in production. Douglas did not believe that profits were a major concern in regards to consumers not being able to pay the prices attached to goods and services.

In his book, “The Monopoly of Credit” he wrote:

“Purchasing power, therefore, is not, as might be gathered from the current discussions on the subject, an emanation from the production of real commodities or services much like the scent from a rose, but on the contrary, is produced by an entirely distinct process, that is to say, the banking system…”

Bearing this in mind, we can understand that it is impossible for a closed community to operate continuously on the profit system, if the amount of money inside this community is not increased, even though the amount of goods and services available are not increased. This obvious but commonly overlooked fact forms the justification, if any, for the idea on which Socialist policy for the past hundred years has been based—that the poor are poor because the rich are rich.

If a number of persons continue to sell articles at a greater price than that paid for them, they must eventually come into possession of all the money in the community, and the only flaw in such a state of affairs would be that it would be self-destructive, since in a comparatively short period of time a small section of the community would own all the money, and therefore the remainder of the community would be unable to pay, and production and sale would stop.

This process probably contributed largely to the rapid accumulation of wealth in the hands of the entrepreneur at the beginning of the nineteenth century, and the limited extent to which the benefits of industrial progress were passed on to the general population; but the profit-making system is certainly not to any great extent responsible for the present situation, since profits have ceased to form an outstanding feature of business.

It is an extraordinary feature of the controversy that they are attacked as immoral as well as undesirable. It has never been clear to me why any man in any position of life should be expected to perform any action whatever which was not in some sense of the word profitable to him, and there is more than a suspicion that the attack upon profits can ultimately be traced to a fear of the economic security offered by this type of remuneration, as compared with that of the wage and salary.”

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)

The control of capital is also a critical issue raised in Social Credit which corresponds to Marxist thought.  Marx thought the owners of capital controlled the capital, and thus; the ownership of capital should be “public”.

Douglas argued in “Credit-Power and Democracy” that finance controlled capital, and those who controlled the money creation organization really directed its use. Douglas further argued that by giving citizens a dividend and price rebate, this would allow consumers to control capital.
 
Take care. J.

Further Response --
“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 J…,
 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 *tomorrow’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 sane 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 labour” and the incomes distributed therefrom.

Those labour incomes, the largest part of A disbursements and receipts, still, in the whole economy, fall overall with increasing labour 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….

Further Comment on A & B Theorem
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