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Triumph
OF THE PAST
Fish will not live where the water is
too clear. But if there is duckweed or
something, the fish will hide under its shadow and thrive. Thus, the people will live in tranquility if
certain matters are a bit overlooked or left unheard. -Yamamoto, Hagakure
February 2006
The A+B
Theorem and the Tragedy of Human Effort
My
friend and mentor Anthony Cooney invited me to write a chapter on the A+B Theorem
for the new Australian Heritage edition of his masterpiece, Social
Credit: Economics, published this month. The text of the chapter follows. See www.alor.org for details on the book.
C. H. Douglas seldom mentions his predecessors, but there is
one he mentions repeatedly, Francis Bacon.
Bacon founded the inductive method of investigation. Starting from phenomena freshly observed, one imaginatively forms a hypothesis to account for
them. The hypothesis, if true, would predict
(by deduction) other phenomena. Multiple
confirming instances reinforce the hypothesis; one counter instance eliminates
it. Action based on the hypothesis will
further test it.
Unlike a
mathematical theorem, the inductive method does not provide absolute certainty
based on self-evident axioms in an abstract world. The inductive method provides abundantly
reinforced hypotheses based on observed phenomena in the real world. Douglas was a pioneer in applying the true Baconian method to real human problems.
In regard to any
application of the inductive method, we may ask (1) What is the phenomenon to
be accounted for?, (2) What hypothesis is proposed?,
(3) What further phenomena are predicted by the hypothesis?, and (4) Are they
confirmed? I will here limit myself to
(1) and (2).
The Problem
The phenomenon/problem that obsessed Douglas the engineer and
to whose solution he devoted his entire life is what he calls the tragedy of
human effort, the gross waste of people's labor. Douglas quotes a statement of H. L. Gantt
that the U.S. industrial system was 5% efficient.1 That means 95% waste. That would mean we were at that time working
twenty times harder than we had to to get the same
results. Without committing ourselves to
particular numbers, anyone not wearing blinkers can look around and see the
same phenomenon today.
We see myriad
jobs that do not actually produce any product or service for human satisfaction;
whole industries that are mere unnecessary adjuncts to, or parasitic on, real
production (or adjuncts to adjuncts); incomprehensible legislation providing
jobs for armies of lawyers and spawning the Alice-in-Wonderland world of the
civil "service"; massive labor diverted from actual production to unproductive
commercial warfare; vast resources diverted to seducing the public; the absurdity
of a country's "living on its exports"; the crime of product
destroyed to keep prices up; the heartbreak of wonderful inventions killed in
the womb; the insult of "job creation" promoted as something
desirable.
We see all the cars
and roads and petroleum used to get people to and from these unnecessary
jobs. We see processing, packing,
transport, distribution, and retail processes expended to put a jar of
apple-sauce on the shelf when you could make a superior product at home by
popping an apple into the oven. All this
in the context of a technological capability that the engineer knows better
than anyone could happily disemploy people. Yet despite all this technology at our
disposal and all this investment of resources, our cities are still shamed by the
specter of homeless and starving people, and even a middle-class
family is but one illness away from economic ruin. The tragedy of human effort cries out for an
explanation.
The Hypothesis
Douglas puts forward a hypothesis, which he says "has
come to be called the A+B theorem."
However, it is not meant to be self-contained like a theorem in
mathematics. Taken as a whole, it is an
inspired guess as to the cause of the tragedy of human effort, subject to confirmation
or rejection by observations in the real world.
It consists of three sentences, which I reproduce one by one and have further
divided into lines to assist a slow and thoughtful reading:
1. In
any manufacturing undertaking the payments made
May be divided into two groups: Group A:
Payments made to individuals
as wages, salaries, and dividends; Group B:
Payments made to other organizations
for raw materials, bank charges, and other external costs.
This premises that payments of a "manufacturing
undertaking" are either to individuals or to organizations. To put flesh on Douglas's hypothesis and make
it easy to follow, let's assume that the manufactures in question are chairs
and that the payments to individuals are wages.
B-payments cover a number of different things, but the most
characteristic and interesting of these is payments to suppliers for capital
goods and services.2 So let
payments to a sawmill for wood arbitrarily stand for all payments to
organizations (as if tools, etc. were free).
2.
The rate of distribution of purchasing power to individuals
is represented by A,
but since all payments go into prices,
the rate of generation of prices cannot be less
than A plus B.
This premises that "all payments go into prices" and
draws the conclusion from the two premises that the prices of the chairs on
sale at each and every point in time ("rate") must be at
least equal to the sum of wages and payments for wood incurred on behalf of
that particular batch of chairs.
3. Since A will not purchase A
plus B,
a proportion of the product at least equivalent to B
must be distributed by a form of purchasing power
which is not comprised in the description grouped under A.3
This is highly condensed and is the source of all the
trouble. At face-value, it says that the
employees cannot buy all the chairs that the wages at each and every point
in time are less than the sum of wages and payments for wood incurred on
behalf of the particular batch of chairs on sale at that point in time. And it indicates a course of action,
namely, to enable the employees to buy all the chairs by introducing "a
form of purchasing-power" that does not go into prices.
The words,
"A will not purchase A+B" tell us two new things. First, they imply that A is supposed to purchase A+B and since A is
money in the hands of the consumer, we learn here for the first time that the
"manufacturing undertaking" is a consumer
manufacturing undertaking. Second, since
the employees of the chair factory would not actually want to buy all the
chairs, we learn here for the first time that we are not really talking about
the product of a single "manufacturing undertaking." Rather, we are talking about all the consumer
goods and services that the nation produces.
If the economy as a whole is like the chair factory, Douglas is asking,
how will individuals in the nation buy the consumer goods and services that the
nation produces?
To liken the
economy as a whole to the chair factory is to say the economy as a whole is one
big consumer production system. In this
view, capital production (like the sawmill), is conceived
as merely an early stage of consumer production. The employees of the
sawmill and the employees of the chair factory are together producing
chairs. The sawmill produces wood that
goes into chairs that are sold to individuals, and all costs of
production are ultimately charged to individuals, whether as taxpayers
(consumers of government) or regular consumers.
So "A will
not purchase A+B" within the context of the one company states that the
employees of the chair factory cannot buy all the chairs but in the context of
both companies together states that the employees of the
sawmill and the chair factory together cannot buy all the chairs.
The Big Picture
In other words, if the sawmill and chair factory were two
divisions of the same company, nothing essential would change. At each and every point in time the
price of chairs would be the same as it was before, and the total wages
available to meet that price would be the same as it was before.
This means that
"A will not purchase A+B" is not the tautology it appears to be,
because the two A's can be different.
With the sawmill and chair factory combined, the first A is the wages of
all the employees at one point in time, but the second A the one that goes
into prices is the wages of each division at different points in time. In that case, "A will not purchase
A+B" states something more complex than at first appears. What it states is that the wages of all the
employees at each and every point in time are less than the wages of the
chair division that went into the particular batch of chairs on sale at that
same point in time plus the wages of the sawmill division that went into that
same batch of chairs plus a payment to, say, a logging company for the logs
that went into the wood that went into that same batch of chairs.
Any company that
is considered as generating prices at each and every point in time must also be
considered as generating wages at each and every point of time (provided it
still exists). If we pursue this process
to its logical conclusion, we eventually encompass the whole economy. The B-element becomes less and less, but
nothing essential changes because the A-element that goes into prices becomes
correspondingly greater and greater. The
most characteristic B-payment can be conceived as a reimbursement for past
A-payments. Therefore, the A+B
Theorem could be rewritten in terms of A over time.
We can think of
the economy as a whole as a single "manufacturing undertaking" existing
over time. And when we think of its life
over time, we realize that we are talking about generations. And if we think of generations, we realize
that we are talking about the entire history of civilization. Yet our grandchildren do not make a B-payment
to us, they inherit from us. And our culture
did not make a B-payment to a preceding culture, it inherited from it. In these cases, Douglas's hypothesis still
has meaning, and we might even say this is where it really comes into its own.
A Chart That Works
Douglas's hypothesis proposes a simplified economic model in
which each stage takes its raw materials or half-made goods from the previous
stage, works them up further, and passes them on to the next stage. We can analyze the cost of the final consumer
good or service produced as a simple addition of A-payments through its whole
cost-history.
Thus, one company
expends A1; the next company reimburses it (B1, equal to A1) and expends A2;
the third company reimburses it (B2, equal to B1+A2), and so on. At each stage, A+B makes a new B; and the
public makes the final reimbursement, which is just like a final B-payment,
called the price. Thus, the final
price could be expressed as A1 + A2 + A3 . . .
+ A100.
We can make a
chart in which one dimension represents wages received for four different
stages of chair production (I've added Retail as a separate stage) at each
and every point in time and the other represents wage-payments incurred for
the same four stages on behalf of the particular batches of goods on sale at
those same points in time. Prices are
got by adding across the columns, and wages are got by adding down
the columns:
(T1) (T2) (T3) Batch T4
Logs(A)
Wood(A) Chairs(A) 1st Retail(A), Price 4A
Logs(A) Wood(A) (2nd) Chairs
(A)
Logs(A) (3rd)
Wood(A)
(4th) Logs(A)
Wages 4A
Notice that in this example, these two numbers are the same,
4A: the employees can buy all the
chairs. But Douglas asserts "A will
not purchase A + B," that is, the number got by adding down the columns is
less than the number got by adding across the columns.
Why would it be
less? The chart above shows a
self-liquidating economy because wages at the logging company, wages at the sawmill, and wages at the chair factory stayed the same
over time. If they became less over
time, then the employees would not be able to buy all the chairs. For wages to become less over time would mean
that less consumer goods and services were required as an inducement to work,
either because people were disemployed or worked
shorter hours or the work became easier or pleasanter.
Now this is just
what it is the nature of labor-saving innovation to do, which is the running
theme of all of Douglas's writings. So
we allow this as Douglas's silent assumption and incorporate it into a
continuation of our chart. The result is
a chart of the A+B Theorem (expressed in terms of A) that is simple and
straightforward, does not involve complex mathematics, is understandable by
anyone, and really works:
(T2) (T3) (T4) Batch T5 T6
Logs (A) Wood (A) Chairs (A) 2nd Retail (A), Price 4A
Logs(A) Wood(A) 3rd Chairs(A 1) Retail (A), Price 4A 1
Logs(A) (4th) Wood(A) Chairs (A 1)
(5th) Logs(A)
Wood (A 1)
(6th) Logs(A)
Wages
4A 1 4A 2
"(A 1)" represents a saving of labor at the
chair factory starting at T5 and a saving of labor at the
sawmill at T6. This could mean
that someone is disemployed or relieved for half the
day or takes a pay cut in return for an easier or pleasanter job.
This simplified
chart doesn't capture the cost of the innovations. But it is obvious that at each and every
point in time across the economy, the balance must always be increasing on the
side of labor saved innovations must be coming to more than they cost if they
were not mistakes.
In addition, this
chart underestimates the real difference between labor now and labor over the
cost-history of the chairs, because the latter really goes back to the dawn of
time. If it were possible to measure the
whole cost-history of the chairs, the result would be a higher price and the
need for a correspondingly bigger injection of a "form of purchasing
power" that does not go into prices.
Conclusion
Douglas's inspired guess, in short, is that under the
influence of (1) the accounting rule that all costs go into prices, (2) the
absence of any "form of purchasing power" that does not go into
prices, and (3) innovation, the money in people's pockets tends to become
chronically insufficient to liquidate the costs of production and that this is
the cause of "the tragedy of human effort."
The A+B Theorem is not a description of the way things are. It is a hypothesis as to the underlying cause
why things are the way they are. Wages
and prices are not usually falling over time in the real world quite the
contrary; but a tendency of wages and prices to fall over time could explain
what we see in the real world.
Similarly, money in people's pockets might not be less than prices in
the real world; yet a tendency of that to happen could explain why things are
the way they are. Douglas's hypothesis
is that the economy reacts against the situation and thus produces the
phenomena that we see.
To enumerate the
various phenomena the hypothesis would predict and look for confirmation or
rejection in the real world would require another chapter. But to have recognized that the A+B theorem is
a hypothesis in a larger inductive investigation and to have expressed that
hypothesis correctly is much.
Notes
1.
Credit-Power and Democracy, p. 16.
2.
Here is a handy mnemonic device:
A is for Allowances
To buy Apples and Ale,
B is for Back-Bursements
To buy Blubber and Ball-Bearings.
3.
Monopoly of Credit, p. 35f.
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