Since Major Douglas wrote about the A+B Theorem, there has been continuous debate and controversy. J.M. Keynes, for example, saw Douglas’ idea as a threat to his own “General Theory” and in an earlier version of that work, attacked it in a footnote. Social Crediters have in general accepted it, but some have sought qualification. A detailed discussion and reworking is given, for example, by John W. Hughes in “Major Douglas: The Policy of a Philosophy”, (Brightest Pebble Publishing, 2004). It is said that Douglas’ original formulation is imprecise and in need of reformulation.
Have borrowed an original 1921 edition of Douglas’ “Credit Power and Democracy”. Inside the book is the name of its former owner, an old time social crediter who dates back to the time of the founding of the League. The pages of the book may be yellowing but the wisdom of its contents are perennial and fresh.
Douglas considers a factory or business F. F distributes purchasing power to individuals through the mechanism of wages, salaries and dividends. But F is also a distributory of financial values, being a manufactory of prices. Thus Douglas divides F’s payments into two groups:
Group A – All payments made to individuals, being wages, salaries and dividends;
Group B – All payments made to other organisations, such as firms and institutions, including raw materials, bank charges and other external costs.
A is the rate of flow of purchasing-power to individuals.
Because the factory/business F is a manufactory of prices, all payments go into prices. Therefore the rate of flow of prices cannot be less that A+B. Now in principle the production of factory/business F should be purchasable by consumers, for surely it is the very point of F to sell its product. Certainly it may want to export a portion of its product, but that only widens the scope of what we consider the “public” willing to purchase, to be.
However A cannot purchase A+B. Why? Simple arithmetic and algebra. If A and B are non-zero and non-negative A+B> A, that is A+B will always exceed A. So what happens to B? This must be distributed by a form of purchasing power not embodied under A.
Douglas goes on to argue in “Credit Power and Democracy” that the additional B- component purchasing power is provided by loan-credits (bank overdrafts) or export credits.
The critics of the A+B Theorem usually argue, ignoring the time factor, that B payments eventually become income. This critique fails because even if this was so for F at time t1, so that B payments become income at time t2, there is still the problem of a deficiency of purchasing power existing at other times in a continuous process. In other words, the proposal leads to a vicious infinite regression, where ultimately A+B will never equal A.
To me it is clear that what Douglas argued to be true for one factory/business F can be generalised across an economy, even a global economy for F1, F2, F3, … Fn. As A+B does not equal A for any of F1, F2, F3, … Fn, at each point in time, then over history A+B cannot equal A at all. There will be a generalised deficiency of purchasing power.
Douglas, I believed, pinpointed a fundamental defect in our present economic system. The sharp rejection of this by orthodox economists shows their inability to realise the deep theoretical incoherence at the heart of their system.