| Subject: | [socialcredit] the "zero sum" fallacy | | Date: | Sunday, May 1, 2005 03:04:47 (-0700) | | From: | William B. Ryan <w_b_ryan @.....com>
|
"If you mean 'banks processing a zero-sum debit-
credit pair to intermediate a debt created by trade
or employment', I would argue again that nothing of
any economic significance has happened."
---------------------------
----------------------------
Tim, I've suffered through your postings, reading
some of them, and suggested previously that you read
the materials at
http://www.geocities.com/socredus/compendium
for introduction to the subject heading of this list.
It does not appear that you have done so.
Your statement above is what is called the "neutral
money" hypothesis. We do not agree with that
hypothesis, simply because it doesn't fit the
observable facts. It ignores the theorem that loans
create deposits; the repayment of loans cancel
deposits. The "debit-credit pair" created by the
loan process is quite independent of actual trade and
commerce, though its purpose is presumably to
accommodate it. The accommodation is not however
automatic, as the historical record demonstrates.
Changes in banking POLICY have profound effects on
the real economy.
The economic process is not "zero sum," nor is double
entry accounting a "zero sum" accounting system,
despite your quirky protestations to the contrary.
From your earlier posting (April 28):-
"Do bear in mind that:
"1. If an enterprise acquired an asset at a price
'below market value', it would normally record an
appreciation to 'market value' immediately after
acquisition.
"2. If an enterprise acquired an asset at a price
'above market value', it would normally record a
depreciation to 'market value' immediately after
acquisition.
"3. If an asset gained value for whatever reason,
it would normally record an appreciation to 'market
value' at that time.
"4. If an asset lost value for whatever reason,
the enterprise would normally record a depreciation
to 'market value' at that time.
"5. If an enterprise disposed-of an asset at a
price 'below market value', it would normally record
a depreciation to disposal-price immediately prior to
the disposal.
"6. If an enterprise disposed-of an asset at a
price 'above market value', it would normally record
an appreciation to disposal-price immediately prior
to the disposal."
---------------------------
----------------------------
Now, Tim, not any of this is true in double entry
accounting. Double entry accounting is the
accounting system for profit and loss. In double
entry accounting, profit is recorded only as the
result of sales, although certain expenses accrue in
the absence of sales--like rent, utility bills,
interest, depreciation etc. So while it is possible
to record a loss, it is impossible (unless you commit
fraud) to record a profit without a sale.
Let's just take your number 1 above. The firm, using
the standard rules of double entry accounting, would
definitely NOT "normally record an appreciation
immediately after acquisition." You appear to have
no accounting knowledge or experience whatsoever.
If the firm "immediately" booked an "appreciation,"
it would be crediting the firm's net worth,
deceptively inflating the firm's operating profit.
That Enron, Parmalat et al. have done so does not
make it "normal." It's abnormal, which is why they
and their accountants are being prosecuted for
misbehavior.
The firm (following proper accounting procedure)
would record the asset at acquisition cost. There is
no profit until a sale. Profit is always defined by
sales, against which costs are matched. If the asset
is subsequently sold for a price that is greater than
its acquisition cost PLUS its cost of selling, only
at that point would profit be recorded.
Remember the adage, buy low - SELL high? Profit is
obtained only with the sale, not before.
The isolated transaction in series production into
final consumption:
Party A sells asset X to party B:
Party A records a profit (or loss) on the
transaction.
Party B records neither a profit nor loss but an
exchange of assets of equal value. It may have
exchanged a financial asset, cash or perhaps its
promissory note, in exchange for a physical asset
which it records as equal in value to the financial
asset that it parted with in its books. As a result
of that transaction the firm's net worth stays the
same. It requires some FUTURE sales transaction in
order to record a profit.
And that future sale is very much contingent not only
on the relative "competitiveness" of that particular
firm, but on the state of banking policy at that
particular point in time.
-
--- Tim Knight <Tim_Knight@NTLWorld.Com> wrote:
> Kenneth Palmerton wrote:
>
> I too have struggled with A+B over many years. The
> conclusion for me is that the confusion comes from
> the detractors. The concept is simple enough. But
> put yourself, if you will, in the shoes of those who
> wish to retain control over the issue of new money
> into circulation.
>
>
> Tim Knight now writes:
>
> First, may I say that I think Social Credit in
> general (and A+B in particular) is a very distinct
> subject from reform of the financial system. I
> believe that you are talking here about reform of
> the financial system?
>
> I am not a conspiracy theorist, but I am more than
> willing to believe that those in power may well be
> acting out of passive or active self-interest.
> However, I personally have no self-interest here,
> and the conclusion for me (so far), in the absence
> of more coherent argument, is that the confusion is
> in the minds of the promoters.
>
> In particular, and I am repeating myself ad-nauseum
> her, promoters will keep using expressions such as
> 'money' without pausing to check that there is an
> economically-significant factor on which the
> reader/listener could 'hang' the expression. When I
> read the expression 'money' above, and when I read
> 'the issue of new money into circulation', my brain
> went into numb. I haven't the faintest idea what
> you're talking about. With respect, I suspect you
> and all others who use the expressions don't know
> either. I have to assume that, because I've laid
> down more than enough challenges in this forum and
> elsewhere, and no-one has even acknowledged that
> there is a need to pin down a worthwhile meaning for
> such expressions before using them. Most seem happy
> to use such expressions as a form of 'economic
> musak'. For many years, medieval clinicians banged
> on about 'the humours'. For many years, physicists
> banged on about the nature of the ether (the
> presumed carrier of light). Both communities were
> highly respected professionals, but we now know that
> they were talking complete codswallop. Without
> clearly-defined terms, I have to suspect that Social
> Crediters (including Douglas himself) and money
> reformers, may well also be talking complete
> codswallop.
>
> Please, please help me out here. When you wrote
> 'the issue of new money into circulation', what did
> you mean?
> 1.. If you meant 'the state printing and
> distributing cash', I would argue that:
> 1.. The quantity of cash in circulation is
> determined at the absolute discretion of the
> bearers. No-one can 'push' cash into circulation,
> and no responsible state would undermine the fluency
> of trade and employment by constraining the quantity
> of cash in circulation below what potential bearers
> wanted to bear.
> 2.. Each item of cash reflects a debt owed by
> the issuer to the bearer, but that debt is
> economically-indistinguishable from any other debt.
>
> 3.. When a bank 'withdraws' cash from the state,
> the bank credits the state in a current account and
> debits the state in a cash account in a single
> indivisible transaction. Nothing of any economic
> significance has happened.
> 2.. If you mean 'banks processing a zero-sum
> debit-credit pair to intermediate a debt created by
> trade or employment', I would argue again that
> nothing of any economic significance has happened.
>
> So, what exactly did you mean? Please do not use
> the expression 'money' in any answer you feel
> inclined to make!
>
> I'm sorry to be so strident, but I can't get anyone
> to even try to address my concerns, or even to
> acknowledge that there is a case to answer. Most
> simply repeat their arguments, re-using the
> expressions which fried my brain first time round!
> I suspect that that is the real reason why social
> credit and proposals for reform of the financial
> system have made so little progress, and will
> continue to struggle. All of the advocates talk in
> 'insider' terms, and dismiss as naive or fools those
> who have reservations. None appear willing to speak
> in language with which non-believes can 'engage'.
>
> Best Wishes
>
> Tim Knight
> Tim_Knight@NTLWorld.Com
>
> ----- Original Message -----
> From: "Kenneth Palmerton"
> <kenpalmerton@cix.compulink.co.uk>
> To: <socialcredit@elistas.com>
> Cc: <kenpalmerton@cix.compulink.co.uk>
> Sent: Thursday, April 28, 2005 3:26 PM
> Subject: Re: [socialcredit] Douglas - A + B and the
> Bankers - January 1925
>
>
> > In-Reply-To:
> <01e801c54b53$e0ee2780$0200a8c0@mshome.net>
> > Dear Tim.
> >
> > I do not know whether my comments would either be
> welcome, or even if they
> > could be useful to you. But I too have struggled
> with A+B over many years.
> >
> > The conclusion for me is that the confusion comes
> from the detractors. The
> > concept is simple enough. But put yourself, if you
> will, in the shoes of
> > those who wish to retain control over the issue of
> new money into
> > circulation.
> >
> > Should some clever clogs come along and offer an
> explanation of why it is
> > essential for the health of society for there to
> BE a regular, and
> > controlled issue, because there is a fundamental
> and inevitable flaw in
> > the orthodox notion of equilibrium, would you not,
> if you had the power,
> > mobilise all the forces at your command to defeat
> that explanation?
> >
> > I for one Tim have scanned reams and reams of
> mathematics that attempted
> > to "prove" A+B, and Keynes "deficiency of
> effective demand" , its second
> > cousin, to be false. All it really achieved is
> what it was intended to
> > achieve, to confuse me.
> >
> > But what it did NOT achieve was to persuade me of
> the falsity of the basic
> > idea. For I, like many others, am an essentially
> practical person. And I
> > would suggest to you that there is an essentially
> practical test of
> > whether or not there was something in the idea of
> a lack of money in the
> > publics pockets. And the test can be conducted in
> any High Street , in any
> > town in this country or anywhere else.
> >
> > If you look at the windows of the stores, stores
> that are bursting with
> > goods and services, almost without exception they
> have emblazoned across
> > then offers of CREDIT.
> >
> > Why, if there is enough purchasing power to buy
> all those desirable goods,
> > do the shopkeepers assume that they need to offer
> deferred payment?
> >
> > Add that to the need to offer an explanation for
> escalating indebtedness,
> > and I think you can forget the reams of
> mathematics.
> >
> > Does any of this make sense to you Tim?
> >
> > Ken.
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