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Hi Joe:
I think that capital inventment does both. However,
the fact that capital investment helps close the gap between purchasing power
and the price of consumer goods is irrelevant. This is the arguement
Keynsians make for "priming the pump".
The fact that spending on capital production brings about
an increase in the production of consumer goods does not address the
issue. The point is addressed in Douglas' article "A Mechanical View of
Economics":
"What is, of course, common to the two is the “inducement to produce,” but
that may or may not be a sound inducement."
You don't have to build monuments to the state, or bridges
to nowhere, in order to induce the production of consumer goods that people
actually desire.
You may be thinking, "what does this all have to do with
depreciation?", and I will explain.
From my understanding of what Bill is trying to
demonstrate in his diagrams, during periods of capital expansion the fact that
capital is depreciated over a period of time allows firms to operate at a
profit. If firms did not operate by delaying expenses, aggregate disbursements
by firms would exceed sales receipts and there would be no incentive to produce.
I agree with that thesis, but would like to add the
statement made by Douglas, "that may or may not be a sound
inducement".
I found the following statements by Bill to be very
revealing:
"Double entry accounting does not actually measure
profit. While we can think of profit we have no way of measuring it in
absolute terms. Double entry accounting is an algorithm that relates
current investment against future sales. If an individual entrepreneur's
profit is increasing by this measure, he is satisfying the demands of his
customers, and his credit standing with his financiers and the community is
increasing." (Bill Ryan)
"So accounting profit is not measuring anything tangible
whatsoever. It is in fact an accounting fiction. At best, in
determining profit, double entry accounting is telling us something about how
current investment is affecting future sales, after the fact, when sales have
become recorded. It is a useful but not perfect algorithm. Whether
or not profit is increasing is useful information." (Bill
Ryan)
"The accounting rate of profit therefore has only a
cursory relationship to the hypothetical concept of real profit. The
concept of "economic profit" presented by economists is something quite
different. Besides, economic profit is impossible to measure, and
therefore cannot serve as a guide to entrepreneurs and their financiers in
determining the course and direction of production. Accounting profit can
do that, so long as we realize it is an imperfect algorithm subject to rational
adjustment, which is what we do through Social Credit remedies like the National
Dividend and Retail Discount." (Bill Ryan)
Take care,
Jim Schroeder
----- Original Message -----
Sent: Thursday, March 26, 2009 10:26
AM
Subject: Re: [socialcredit] Re:
depreciation
This all comes back to a question that I raised several
years ago, Jim, not long after you and I first joined this group. I
still don't know the answer to it.
As I remember, it concerned whether consumer
prices, in general, increased in Alaska around the time the annual
oil dividend was paid out? Or did they remain pretty much the
same? Was there simply an increased turnover due to the increase
in purchasing power after dividend payout time? Or did prices take
a sudden jump upwards in anticipation of there being more money
available?
I certainly don't know, nor have I been able
to find out yet.
It seems to me that pretty much the same question
arises in a period of economic expansion. Certainly if there
are enough large capital projects underway simultaneously consumer
prices do rise, and there is an illusion of prosperity, (which, in
a sense, for many people, is going to be more than an illusion ~
they are actually increasing their standard of living ~ even if they're only
enabled to go into hock to do it.)
But the question Douglas raised remains, "Who is
really ever advantaged by higher prices?" Yet a 'deflation' seems to be
more feared than an 'inflation'. I would imagine perhaps because
you can't get a proper feedback of consumer demand when everyone is holding
off buying everything they can 'today' in expectation of a cheaper price in
the market 'tomorrow' that, for all but essentials, never really
comes.
Too many question, still too few answers. Or maybe
I'm just missing them.
Joe
----- Original Message -----
Sent: Wednesday, March 25, 2009 2:01
PM
Subject: Re: [socialcredit] Re:
depreciation
"Now do you see how 'depreciation' allowances INCREASE
purchasing power in a period (the year you bought the tractor, in this case)
of economic expansion? "
The "gap" identified by Douglas is the gap between
purchasing power and PRICES.
Increasing purchasing power will have absolutely no
effect if prices are increased by an equivalent amount.
There are TWO factors that
effect prices.
1) Costs
2) What an item will fetch
An analysis of depreciation expensed over time is an
analysis of COSTS.
Take care,
Jim Schroeder
----- Original Message -----
Sent: Wednesday, March 25, 2009 2:48
PM
Subject: RE: [socialcredit] Re:
depreciation
Joe, if, and only if, the tractor was purchased through new
credits, not savings, the investment in its purchase put new money into
circulation.
That has absolutely nothing whatever to do with the
costing of its purchase into prices later, which process raises costs, not
purchasing power.
Regards.
John R.
From: thomsonhiyu@shaw.ca
To:
socialcredit@elistas.com
Date: Wed, 25 Mar 2009 08:32:49
-0800
Subject: Re: [socialcredit] Re: depreciation
(John Rawson wrote:-) (from Bill Ryan) "... the gap is
eliminated by the process of depreciation." Depreciation charges are not
part of the cost of general production? They are in my case,
and I don't see how this becomes reversed when put into the economy
as a whole.
(Joe replies:-) Let's say you buy a new
tractor for your farm. Whether you pay for it from 'savings' or from
'borrowing' we'll leave aside for the moment. The tractor costs you
$ 10,000, say. And we'll say you expect it will last 10
years. You're going to run it until the wheels fall off.
You don't recover the FULL cost of the tractor
in the year you've purchased it.
You can't raise the price of your tropicals that
much, your competitors will undersell you. Nor does it allow you to
produce that many more of them to put on the market in that year to get
the full $ 10,000 you've spent back. In that year.
So you 'expense' the tractor over it's expected
lifespan. To do so you have to recover $ 1,000 per year in
depreciation costs from the sale of your tropicals over each of the next
10 years.
Now however you have paid for the tractor, whether
from 'savings', or from 'borrowing', you have spent
$ 10,000 into the economy in 'costs' the year you
purchased the tractor. That's "economic expansion", is it not?
The purchase of the tractor is going to hopefully allow you to improve
your business.
But you are only going to have to recover $ 1,000 of
that in 'prices' in that year to cover your 'depreciation'. And
every other year, for the next 9 years.
Now do you see how 'depreciation' allowances
INCREASE purchasing power in a period (the year you bought the tractor, in
this case) of economic expansion? Expand that to the WHOLE
economy in a period, probably extending over several years, of economic
expansion. More is being spent in total 'costs' than is
simultaneously being recovered in 'prices', yet through accounting
conventions Firms can still book profits.
Regards,
Joe
----- Original Message -----
Sent: Tuesday, March 24, 2009 12:24
PM
Subject: RE: [socialcredit] Re:
depreciation
Thanks Bill.
I think it is reasonable to deal
in normal English rather then accounting jargon.
However, yes, I was
imprecise. Under true old capitalism, with capital created out of
savings, items paid for by that method would tend to cause a "gap".
However, they would do it by reducing purchasing power paid out rather
than increasing the price of goods.
"... the gap is eliminated by the
process of depreciation." Depreciation charges are not part of the cost
of general production? They are in my case, and I don't see
how this becomes reversed when put into the economy as a
whole.
Regards.
John R.
> Date: Tue, 24 Mar 2009 07:36:30 -0700
> From:
william_b_ryan@yahoo.com
> To: socialcredit@elistas.com
>
Subject: [socialcredit] Re: depreciation
>
>
>
"...instead of the cost of a new machine being costed (by saving method)
into prices in one year, it is spread of over succeeding ones. It is
still the cause of a potential "gap". I fail to see how something that
causes it can reduce it in any year."
>
-----------------------------------------------------
>
------------------------------------------------------
>
>
I don't know what the "saving method" is. It's not a term from
accounting. How is it the cause of a potential gap? If the new machine
is not depreciated but expensed immediately, there is indeed a gap
between disbursements and receipts in an expanding economy. Cash flow
accounting would report a continuous loss. By delaying the expensing of
the disbursement utilized to purchase the machine, it is expensed
against future income that is prospectively greater than today's
disbursements. So the gap is eliminated through the process of
depreciation. And it isn't entirely through depreciation, although
depreciation is the larger part of it. Dividends are never expensed. The
purchase of land is never expensed, although there are capital gains and
losses when it is sold.
>
> --------------------original
message------------------
>
> Subject: RE: [socialcredit]
depreciation
> Date: Sunday, March 22, 2009 07:50:04 (+0000)
From: John G Rawson <johngrawson @.......com>
> In reply
to: Message 6471 (written by william_b_ryan)
>
> Thanks,
Bill. I don't see where I am confused when your major paragraphs tell me
exactly what I understand. To cut the bull out of it, instead of the
cost of a new machine being costed (by saving method) into prices in one
year, it is spread of over succeeding ones. It is still the cause of a
potential "gap". I fail to see how something that causes it can reduce
it in any year. The only way it could do that would be by injecting
purchasing power in some way, and any such effect must be secondary to
the main process. Diagrams or not, how this can directly reduce the gap
in any year is beyond me. And if you can not explain it without them, I
believe they must be "loaded", to say the least.
> Regards.
> John R.
>
> Date: Sat, 21 Mar 2009 14:36:03 -0700
> From: william_b_ryan@yahoo.com
> To:
socialcredit@elistas.com
> Subject: [socialcredit] depreciation
>
> "...tell me how depreciation allowances can inject
purchasing power into the economy except through saving taxation,
therefore increasing profit to make dividends possible."
>
--------------------------------------------------------
>
---------------------------------------------------------
>
> You're simply confused as to what depreciation is and what
depreciation does.
>
> Depreciation is the delaying of the
expensing of a disbursement. At some point in time a disbursement is
made; at a later point in time the disbursement is expensed. Usually it
is expensed over a series of points in time through a schedule. The
theory being that an asset purchased becomes an expense only as the
asset wears out through time. The effect for the economy as a whole,
where there are many firms depreciating assets, is that the
disbursements curve for the economy as a whole is delayed through time
in becoming the expense curve that is charged against the sales curve
into final consumption.
>
> Actual disbursements are
delayed before they reflux back into sales. Think of a pipeline that
contains a volume within the pipeline that is analogous to account
balances. The input into the pipeline is analogous to disbursements; the
output is analogous to the reflux into sales. It takes time for any
molecule entering the pipeline to traverse the pipeline and exit. This
is true whether the rate of input is increasing, decreasing, or
remaining constant. This is an actual physical delay. The delay caused
by depreciation, on the other hand, is dependent on the rules and
conventions of accounting, which are quite arbitrary.
>
>
I refer you once again to the two attached drawings, one in PDF, the
other in GIF.
>
> They are stylized with straight lines,
indicating quasi-steady state, where everything is changing, but
everything is changing proportionately to everything else.
>
> Look at where the curves are sloping upward. This would be
during a period of normal expansion. The disbursements curve leads the
receipts curve. The differential between the curves indicates
accumulation into account balances. The receipts curve is the
disbursements curve delayed in time. For the purposes of this
illustration the delay is assumed to be constant.
>
> Also
notice that at any point in time, the rate of disbursements is always
exceeding the simultaneous rate of receipts. That is to say there is
always a negative cash flow on the part of the firms.
>
>
This would seem to indicate a "gap" between "prices" and "purchasing
power" if that were all there was to it.
>
> But double
entry accounting delays the disbursements curve more than the
corresponding physical delay, such that it when it is expensed against
sales, sales is greater than expense. This yields a positive rate of
profit according to the rules and conventions of accounting.
>
> Note that during the period of expansion, firms have a negative
cash flow, but a positive rate of profit. During the period of
expansion, account balances are accumulating.
>
> During
the period of contraction, firms have a positive cash flow, but a
negative rate of profit. During the period of contraction, account
balances are depleting.
>
> So during the period of
expansion, because of the delay in expensing caused by depreciation,
there is no actual "gap" between "prices" and "purchasing power."
>
> During the period of contraction, again caused by
depreciation, there is indeed a "gap" between "prices" and "purchasing
power."
>
> The A + B theorem itself relates to something
different than this actual "gap" during the period of contraction. It
relates to the continuous fall in the rate of profit that results from
labor displacement, which operates equally during periods of expansion,
stasis, and contraction. The fall is the result of a flow in double
entry accounting that reports a falling rate of profit even though
productive capacity is increasing, and real demand remains to be
satiated. If anything, double entry accounting should ideally be
reporting an increasing rate of profit. The flaw reports misinformation
to the entrepreneurs and their financiers causing them to be always
pulling back from existing projects, and shifting their resources into
newer projects, that has nothing to do with actual changes in physical
conditions or real demand. This misinformation is very wasteful of
productive capacity.
>
> Social Credit is about applying
macroeconomic accounting adjustments to correct for this flaw. The
desired result is truth in accounting. It is analogous to applying leap
year adjustments to the calendar to adjust for the fact that the Earth
does not rotate about the Sun in exactly 365 days.
>
>
> ----------------original message---------------------
>
> Subject: RE: [socialcredit] Time and Social Credit--replying to
Rawson
> Date: Saturday, March 7, 2009 21:35:20 (+0000) From:
John G Rawson <johngrawson @.......com>
> In reply to:
Message 6402 (written by Joe Thomson)
>
> Joe, I think I
know all that. But tell me how depreciation allowances can inject
purchasing power into the economy except through saving taxation,
therefore increasing profit to make dividends possible. And please, stop
using "macroeconomy" as a magic word that excuses illogic. It means the
total economy, which is what Social Credit studies all the time. I have
never got away from it; I don't think any other correspondents have
either.
> Regards.
> John R.
>
>
>
>
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