Tuesday, July 4, 2017

Barkley Rosser — Comments on Profit and Capital


Summary of the meanings and uses of the terms "capital" and "profit." Barkley Rosser covers a lot of background in a few short paragraphs.

From the logical perspective, the problematic is that "capital" and "profit" are ordinary language terms that are also technically defined differently in various economic and financial accounts. The quest for the "real" meaning as the "essence" denoted by "capital" and "profit" is therefore doomed to failure.  There is no there there.

This is a problem generally in economics and social science. It is very difficult to establish key terms technically in a way that compels general agreement. Therefore, a plethora of competing theories, none of which are able to rule the day since none qualifies as a best explanation in terms of the commonly accepted criteria of 1) consistency/comprehensiveness, 2) correspondence/evidence, 3) usefulness/practicality, and 5) economy/elegance. So it becomes take your pick, or come up with something that purports to be "better."

Angry Bear
Comments on Profit and Capital
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

45 comments:

AXEC / E.K-H said...

The profit theory is false since Adam Smith. This is one of the greatest embarrassments in the history of the sciences. For the proof see:

Profit and stupidity
http://axecorg.blogspot.de/2017/06/profit-and-stupidity.html

Economists: scientists or political clowns?
http://axecorg.blogspot.de/2017/06/economists-scientists-or-political.html

and cross-references Profit
http://axecorg.blogspot.de/2015/03/profit-cross-references.html

Egmont Kakarot-Handtke

Bob said...

They could never agree on a theory of profit. But the show must go on...

Magpie said...

Bob said...

They could never agree on a theory of profit. But the show must go on...

The problem is not that "they" (who are "they" anyway?) cannot agree on a theory of profit. The problem is that there are many people who find a theory of profit inconvenient. Is not that they can't, is that they won't.

We've just witnessed in this blog a capitalist defending capitalism against the most basic and elemental logic, against fact, against decency. Why? Is that because the guy is blind? The fact people like him are making money like crazy has nothing to do with that?

Advances in philosophy and science always, invariably affect lots of people. Those whose interests are negatively affected have an incentive to oppose those advances. Not only that, they usually have the means to do so.

Take the Catholic Church as an example. It opposed tooth and nail rationalism, science, and the Enlightenment. God, they even opposed the Bible being translated to modern languages. Why?

Popes and cardinals, bishops, and theologians were the intermediaries between God and the rabble. God spoke to them and they communicated what he said to us: they had the monopoly in biblical interpretation. They decided what was legitimate or not. They crowned emperors, for Christ's sake!

Is it difficult to understand that in a world where faith is no longer the guide to human behaviour the Princes of the Church lose?

Let's go back to our present. It's no secret that coal mining corporations fund climate change denialism, just like, in its day, Big Tobacco funded opposition to anti-smoking campaigns. Wall Street funds the Democrats, industrialists fund the Republicans. It doesn't take a genius to understand why.

----------

And, ultimately, when all else fails, let's seed doubt by hook or by crook.

In Spanish they have a saying, which roughly translates as "when the water is murky, the fishermen win": the fish can't see what they are biting.

That's what's behind the postmodern "everything goes": if one cannot disprove what one dislikes, let's make the water murky.

MRW said...

MAGPIE: We've just witnessed in this blog a capitalist defending capitalism against the most basic and elemental logic, against fact, against decency. Why? Is that because the guy is blind?

Who are you talking about?

Magpie said...

MRW said...

Who are you talking about?

A few days back there was a rather caustic exchange. One side defends the view that capitalism, social hierarchy, wage labour, profits are natural things: they reflect human nature. You can't stop cats from hunting mice: it's in their nature. Well, something like that only with humans. Presumably, those things are in our DNA.

If those things are human nature, then capitalism is the pre-ordained result of 150-200 thousand years of human development and "has always been with us". In a way, from our nomadic ancestors to the classical slavery and medieval serfdom in Europe, Africa, Asia, Oceania and the Americas, everything that has transpired were unsuccessful attempts, child's staggering steps, towards organising society on a capitalist blue print: capitalism was there, even if only in embryo.

By shedding atavistic features, gradually but inexorably human society evolved towards that end: capitalism and, I imagine, liberal democracy.

And this is, too, where human evolution must stop. We reached The End of History. TINA.

It is a happy ending, too. Capitalist social hierarchy is not only natural but inherently good, nay, it is the best possible one. We are led by the best, wisest, most skilled ones: the capitalists. And the beauty of this arrangement is that the vast majority, those less gifted ones, have nothing to complain: they, the workers, were finally emancipated, freed ... by their bosses. That's, after all, what the word boss means: liberator, isn't it? A bossy person is someone who sets you free.

At any event, that word, bosses, doesn't do justice to the bosses. It doesn't sound good. Job creators sounds much better: human instances of that other Creator. Humanity, or at least the best part of it, finally transcended its animal origins and evolved into something greater.

That's why we all are so happy and satisfied. Any deviation from that heaven on earth leads inevitably to totalitarianism: that's the only conceivable way to stop people from clamoring desperately for capitalism, social hierarchy, wage labour and profits. We are so fucking happy.

Or, at any event, that's how our selfless, disinterested capitalist champion of capitalism sees humanity, history, and the future.


Or read for yourself

http://mikenormaneconomics.blogspot.com/2017/06/chris-dillow-why-libertarians-should.html?showComment=1498663117227#c6667067905250254550

And

http://mikenormaneconomics.blogspot.com/2017/06/chris-dillow-why-libertarians-should.html?showComment=1498663731376#c1260961634500122685

Magpie said...

Incidentally, MRW, if you thought that that person was a libertarian or an anarcho-capitalist, well, think again.

He may have lifted every single point of the "How to defend capitalism" talking points. That passionate defence of capitalism may check every single argument the people from Mises Institute advance.

But he ain't a libertarian, no siree. At least, he denies that.

AXEC / E.K-H said...

Magpie

You say: “The problem is not that ‘they’ (who are ‘they’ anyway?) cannot agree on a theory of profit.”

‘They’ are Walrasians, Keynesians, Marxians, Austrians, and Pluralists. And this means that ‘they’ “fail to capture the essence of a capitalist market economy.” (Obrinsky) This, obviously, includes you.

Egmont Kakarot-Handtke

Bob said...

The problem is that there are many people who find a theory of profit inconvenient. Is not that they can't, is that they won't.

Magpie,

Have you read AXEC's theory of profit?

It may be ideologically inconvenient.

Magpie said...

Bob said...

Have you read AXEC's theory of profit?

It may be ideologically inconvenient.


No, Bob, I haven't read any of that.

There are plenty things I have never read. I haven't read any books on astrology, necromancy, spiritism, esotericism, either. I haven't read anything from Scientology.

For that matter, I have never read any book on quantum mechanics or string theory, either.

After finding Egmont's comments even in the soup, I lost what little curiosity I once felt for it. So, I'm sorry to say, I fear I never will.

Have you? You can give me the gist of it, if you like.

Bob said...

I read some of it, but I don't understand it.

It is a macroeconomic definition of profit, quite different to that understood by business owners. It's not a definition where you can say that "profit" is related to the exploitation of labour. Or where "profit" is related to the "brilliance" of management.

AXEC / E.K-H said...

Profit theory in less than 5 minutes
Comment on Bob on ‘Comments on Profit and Capital’

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.* In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

In case (i) the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Total profit is scattered among the firms that comprise the business sector.

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, innovation, capital, power, monopoly, waiting, risk, greed, the smartness of capitalists, or any other subjective factors. Total profit/loss is objectively determined in the most elementary case by the change of the household sector’s debt.

Economists who observe a single firm and generalize what they see do not understand that what is true for a molehill (= micro) is NOT true for the universe (= macro). Micro profit theory is simply a Fallacy of Composition.

The profit theory is false since Adam Smith/Karl Marx.

Egmont Kakarot-Handtke

* (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start it holds X=O. Note that ALL variables are measurable.

Bob said...

What happens when you add investment, government and foreign trade?
Can we add one element at a time?

AXEC / E.K-H said...

Bob

The balances of the business sector, the household sector, the government sector and the rest of the world are interrelated as follows: Qm≡-Sm+Yd+I+(G-T)+(X-M). This is the Proft Law for an open economy (X-M) with a government sector (G-T) and with business investment I and distributed profit Yd.

Egmont Kakarot-Handtke

Bob said...

Elementary case: an economy consisting of a business sector (employer) and a household sector (employee).

Qm ≡ -Sm
Profit ≡ -Savings
Profit ≡ -(Wages - Consumption)

My first conclusion is that Qm is a measure of production and Sm is a measure of consumption. In a 'perfect' economy, everything that is produced is consumed. The cost of production is Wages. The cost of consumption is Wages. Wages are monetary or $. When $ is exchanged, production or consumption occurs. The period of time between production and consumption entails a loss for the business sector and a gain for the household sector. The period of time between consumption and production entails a loss for the household and a gain for business. The effect over time is that the two cancel each other out and net to zero. This is a macro effect. As you state, it has nothing to do with individual firms and households. Their perception of profit and savings remains as is.

It seems to me that the term Profit is actually Profit/Loss or Gain/Loss or Cost/Reward. Since businesses produce goods and services, perhaps the term can be Production Cost/Reward?

Bob said...

I suppose an equivalent term for Consumption is Sales. Hence Qm = Sales - Wages

AXEC / E.K-H said...

Bob

You say: “My first conclusion is that Qm is a measure of production and Sm is a measure of consumption. In a ‘perfect’ economy, everything that is produced is consumed.”

Not quite, monetary profit Qm and monetary saving Sm are nominal variables, the real variables are output O and quantity bought/sold X. All variables are related to a period of defined length, usually the calendar year. Because ALL variables are measurable all conclusions are testable. There is no ambiguity of any sort.

For a detailed verbal and graphics supported description of the elementary consumption economy see ‘How the intelligent non-economist can refute every economist hands down’.

http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

Egmont Kakarot-Handtke

AXEC / E.K-H said...

Bob

For the summary of the discussion see
http://econospeak.blogspot.de/2017/06/comments-on-profit-and-capital.html?showComment=1499518826458#c7906826356427584858

or here
https://axecorg.blogspot.de/2017/06/economists-scientists-or-political.html

Egmont Kakarot-Handtke

Bob said...

I do not understand that type of diagram. A relationship between two variables can be plotted on a two dimensional graph with vertical and horizontal axis. The result of vectors can be plotted similarly. Beyond that, it's confusing.

For now, I need to confirm the real variables being used.

(i) Yw=WL wage income Yw is equal to wage rate W times working hours L
e.g. 10$/hr x 40 hours = 400$ income

(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
e.g. 5$/unit x 20 units bought/sold = 100$ exchange

(ii) O=RL output O is equal to productivity R times working hours L
e.g ??? x 40 hours = ???

I'm assuming that Productivity is a monetary unit and that Output will also be monetary. R is thus the wage rate paid and O is the production expenditure. Alternatively, R could be abstracted as the value of commodities produced and O the total value, which would equal the market clearing price when sold.

Assuming this is the case, these variables remain as measures of the production and consumption of commodities over time.

Bob said...

To my knowledge, the Marxian definition of Profit was based on the firm, not on the economy as a whole.

Tom Hickey said...

To my knowledge, the Marxian definition of Profit was based on the firm, not on the economy as a whole.

Marx's view is based on macro analysis as I understand it. It's the macro surplus that is labor value plus capitalists' profit (rent). This is similar to the feudal structure of workers providing the production and landlord pocketing the difference between labor bill and revenue from sales. The surplus over cost as not earned, so it was considered rent.

AXEC / E.K-H said...

Bob

(i) You say: “I do not understand that type of diagram.”

Think of a Cartesian coordinate system#1. Take the first quadrant = north east and throw the other three quadrants away. The first quadrant has only positive values on the axes. Make this four times. Now, put the four first quadrants together, then you get a new coordinate system with ALL axes positive. Thus you can easily walk from one quadrant to the next because the axes have the same dimension, e.g. L = hours per year, or C = dollar per year, or O, X quantity per year. Negative axes are not needed in economics because output O or working hours L are always greater or at least equal zero.

(ii) Productivity is a real magnitude with the dimension quantity per hour.

(iii) The Marxian definition of profit is ultimately based on the labour theory of value which does not relate to the economy as a whole. But Marx applied also macro reasoning, for example: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.” This question is answered by the Profit Law Qm=-Sm (see above).#2

Egmont Kakarot-Handtke

#1 Wikipedia Cartesian coordinate system
https://en.wikipedia.org/wiki/Cartesian_coordinate_system

#2 For more details see ‘Marx, the moron’
https://axecorg.blogspot.de/2017/06/marx-moron.html
and ‘Profit for Marxists’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301

Bob said...

But surplus is not synonymous with profit. The serf produced a surplus that was appropriated by the lord. Gnerally speaking, the labour force does not consume all that it produces - a portion has to be set aside to support everyone who is not in the labour force.

At the level of the firm, surplus is synonymous with profits.

Bob said...

Okay, more to digest. Until later.

AXEC / E.K-H said...

Bob

You say: “But surplus is not synonymous with profit.”

No, surplus is a real magnitude and profit is a nominal magnitude. For the relationship between the two see Section 4 ‘Profit, surplus, real shares’ in ‘Profit for Marxists’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.

Egmont Kakarot-Handtke

Tom Hickey said...

But surplus is not synonymous with profit.

It is a matter of definitions, and definitions are not necessarily as positive as they may appear to be. There is also a normative (ideological) aspect to them too.

Surplus as profit implies profit is rent.

Marginalism implies that profit is the marginal product of capital, therefore, just deserts.

There is no "natural" state of either society or an economy. Calling one version "natural" doesn't make it so, and usually the use of "natural" is a tip off that ideology is being introduced in by the back door.

Bob said...

AXEC provided a quote that may indicate how far Marx went in developing a macro version of profit. In other words, not far enough.

According to Marx, labour surplus is what allows human beings to survive. We might say the same is true for bumblebees. It's not specific to capitalism or feudalism, it's a necessity.

The 1930s Technocracy movement described it as the process of obtaining extraneous energy from the environment. At first, this was limited to human brawn. Over time, tools were developed, animals were employed to do work, and then more concentrated forms of energy were harnessed. Our standard of living and our very lives depend on this process.

Bob said...

Ok, so the diagram is one where the origin (0,0) is at the center and the 4 axis represent equal periods of time. Each axis is labeled according to the variable to be plotted, in relation to another variable.

(ii) Productivity is a real magnitude with the dimension quantity per hour.

Then e.g. 10 units/hr produced x 40 hours = 400 units of output.

Thus Qm expressed as O is expressed as a quantity. Sm expressed as X is a quantity.

Bob said...

100 bicycles are produced. Shipment of 100 bicycles is stolen and cannot be recovered. Nominal profit representing the market value of the bicycles is lost, while the surplus (the bicycles) remain.

Tom Hickey said...

"Surplus" doesn't have a single meaning that denotes the "essence" of surplus. Generically, it means "more."

For Marx, there was no "economics" as such in subsistence societies. There were no goods produced for exchange (commodities), no wages, and no unemployment. Everything was used up by producers that produced "on time." Or they didn't and died. There was no inventory either.

Goods produced for exchange are commodities. They are surplus over subsistence, what a worker can produce in addition to meeting subsistence needs. Then the question becomes one of mode of production, which is institutional. Historically it was imposed through class structure and class power according to Marx and based more on evidence than the competing just-so stories.

There really was no surplus before agriculture during the hunter-gathers stage of development in which subsistence living was the rule.

Agriculture was divided into farming and pastoralism. "Capital" comes from the Latin word of head, meaning head of livestock. In pastoral communities wealth was based on head of livestock. In farming communities wealth was based on stocks of produce, mostly grain, that were stored up for future use.

In a monetary economy, there is a monetary surplus also, which accrues from exchange of commodities (surplus over subsistence) for money. In urban environments arts, crafts and trades were also practiced but initially their contribution was less than farming and pastoralism and most of the population was engaged in agriculture. This remained largely true until modern times and the development of technology.

Workers create more goods than needed for their subsistence using skill and technology. This is the real surplus (over subsistence). The monetary surplus is the difference between monetary cost of production (wage bill) and sales revenue. Monetary surplus accrues from exchange of real surplus for money.

Workers earn money as wages from work. Capitalists extract rent based on ownership, without work.

In a socialist monetary economy, the monetary surplus is divided among workers and they are able to mutually purchase the real surplus (commodities produce for sale) in excess of provisioning for subsistence fairly equally based on income from their work.

In a capitalism monetary economy, the monetary surplus goes to owners of "capital" (land, technology, accumulated financial resources) and they are able to command more of the real surplus with it as well as invest to increase their real capital and thereby also their financial capital. This is expropriation according to Marx and it was initiated by primitive accumulation through class power and developed through class structure and class power.

Admittedly this is a somewhat crude summary of Marx's thinking, but I think it captures the line of argument.

AXEC / E.K-H said...

Bob, Tom Hickey

Everybody who has ever used knife and fork or a wheelbarrow or a cooking spoon somehow understands the concept of lever and can apply it successfully in everyday situations. Science, though, goes beyond the endless multitude of concrete instantiations of the lever and tries to figure out the common denominator of ALL variants of levers past, present, and future. Science abstracts from the superficial reality of the Here and Now and tries to figure out the underlying fundamental reality, which has been found to be Fb/Fa=a/b: “This is the law of the lever, which was proven by Archimedes using geometric reasoning.” (Wikipedia)

The failure of economics is mainly due to the Fallacy of Insufficient Abstraction.#1 In other words, economists cannot rise above the level of storytelling. One story line is that of supply-demand-equilibrium and the wonderful feats of the Invisible Hand, the other story line is that of the struggle between the good guys=workers and the bad guys=capitalists. Storytelling is scientific rubbish but people like it.

Economics, understood as science, must go beyond common sense, plain description, and storytelling: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future . . . (Schumpeter)

So the first thing to do is to formulate ‘a simple model’ of the abstract entity economy, more precisely, the simplest possible model. The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.

The most elementary economy is given with three equations Yw=WL, O=RL, C=PX, two conditions X=O, C=Yw and the definition of total monetary profit Qm≡C-Yw.#2 This yields P=W/R (1), i.e. the market clearing price P is equal to unit wage costs W/R. This is equivalent to W/P=R (2), i.e. the real wage W/P is equal to the productivity R. This holds, no matter how the wage rate W is set. A wage reduction leads to a proportional fall of the market clearing price P. Profit Qm does NOT change because the budget is balanced, i.e. C=Yw, and from this follows Qm=0, i.e. profit is zero.

In the elementary monetary economy, workers always get the whole output O, the real wage W/P is equal to the productivity R. If productivity increases over time the real wage rises, if productivity falls over time then at some point the real wage hits the subsistence level. This, though, has NOTHING to do with exploitation or surplus or profit. So, as a matter of principle, the elementary consumption economy can reproduce itself at any level of employment L for an indefinite time as long as there are no external limits. It is impossible for the business sector as a whole to make a profit.

See part 2

AXEC / E.K-H said...

Part 2

So, where does profit come from? Not from a longer labor time L, not from higher productivity R, not from a lower wage rate W, not from more greed, not from monopoly power, not from risk taking, not from wishful thinking or any other subjective factor.

It was Marx who asked the right question: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

Trivially true. As long as the budget is balanced, i.e. C=Yw, total monetary profit/loss Qm is zero. Because we know already that the Profit Law states Qm=-Sm it is quite obvious that the business sector as a whole can only draw more out of the circulation, i.e. C greater Yw, if the household sector throws more into the circulation, in other words if the household sector dissaves, i.e. if Sm≡Yw-C is negative, i.e. if C is greater than Yw.

From nothing comes nothing, even economists understand this.#3

Egmont Kakarot-Handtke

#1 For details see ‘Economics and the Fallacy of Insufficient Abstraction’
https://axecorg.blogspot.de/2017/06/economics-and-fallacy-of-insufficient.html

#2 For the detailed verbal description see ‘How the intelligent non-economist can refute every economist hands down’
http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

#3 For more details see ‘The Emergence of Profit and Interest in the Monetary Circuit’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1973952

ANC Driver said...

Excellent discussion between Bob and Egmont - thank you both! I wish there were more willing to do this

ANC Driver said...

Tom Hickey said:

" "Capital" comes from the Latin word of head, meaning head of livestock. In pastoral communities wealth was based on head of livestock. In farming communities wealth was based on stocks of produce, mostly grain, that were stored up for future use."

"In a monetary economy, there is a monetary surplus also, which accrues from exchange of commodities (surplus over subsistence) for money."

"Workers create more goods than needed for their subsistence using skill and technology. This is the real surplus (over subsistence). The monetary surplus is the difference between monetary cost of production (wage bill) and sales revenue. Monetary surplus accrues from exchange of real surplus for money. "

"Workers earn money as wages from work. Capitalists extract rent based on ownership, without work."

"In a socialist monetary economy, the monetary surplus is divided among workers and they are able to mutually purchase the real surplus (commodities produce for sale) in excess of provisioning for subsistence fairly equally based on income from their work.

In a capitalism monetary economy, the monetary surplus goes to owners of "capital" (land, technology, accumulated financial resources) and they are able to command more of the real surplus with it as well as invest to increase their real capital and thereby also their financial capital. "


The key difference between 'livestock, grain, etc', and 'money', is that the former is self-reproducing, whereas the latter are always claims against other people. A surplus in self-reproducing things can occur without another being in debt, whereas monetary profits cannot.

In your examples of monetary surplus, it would make sense from a micro-perspective, but not a macro-perspective, which makes any supposed difference between a socialist and capitalist monetary economy as unfathomable from a macro-perspective.

If someone could demonstrate to me, the following:

If we assume only one business sector in the economy which produces all the needs of the population, is owned by say 1% of the population and where the other 99% work for that business sector (excluding children, elderly, incapacitated, disabled, economists, politicians etc); can you first show me where the business sector gets its money to pay the workers, and then second, how those same workers are able to spend more than they earn so the business sector generates a profit, assuming there is no government spending and no foreign trade, and assuming the business sector clears their whole inventory?

Tom Hickey said...

With no government, assume that the medium of exchange is real like bullion. Obviously, workers cannot exchange more than they receive so there is no profit unless there is credit extension, either by banks if they exist or sellers of goods.

If nothing real is the basis of the medium of exchange, then the other option is credit. Credit extension is based on some collateral so eventfully workers taking on debt may be forced to give up whatever they own, e.g., land, or even sell themselves or family into slavery.

And this is what happened historically under those conditions.

Credit of some sort appears to be as ancient as exchange.

Where there is no collateral for credit, then the alternative is some variation of slavery, which is being forced to work for subsistence, or perish.

Tom Hickey said...

If we assume only one business sector in the economy which produces all the needs of the population, is owned by say 1% of the population and where the other 99% work for that business sector

That is either feudalism or capitalism by definition.

By definition, socialism is based on the commons, with no private ownership of the means of production.

Tom Hickey said...

It's also possible to conceive of a scenario with no credit and yet some profit in a system based on real exchange, although I am not aware of any historical examples since credit has been pretty universal.

Assume that some workers are self-employed in prospecting for bullion.

They exchange bullion for goods made by other workers employed by owners of the means of production.

All goods sold are owned by the owners of the means of production for bullion, who get bullion in exchange for goods and pay their workers in bullion for producing all the goods for sale.

The owners of the means of production, having a monopoly on production, adjust price and quantity so that after all goods are exchanged for bullion, there is bullion left over as profit.

ANC Driver said...

"Credit extension is based on some collateral so eventfully workers taking on debt may be forced to give up whatever they own, e.g., land, or even sell themselves or family into slavery....Where there is no collateral for credit, then the alternative is some variation of slavery, which is being forced to work for subsistence, or perish.

Credit of some sort appears to be as ancient as exchange."


Yes, but one must clearly distinguish between credit and exchanges which are intended to be enforced, and those that are not.

I often read of proponents of a credit system over a debt based system, and yet I have not seen any evidence which differentiates the two. Extending credit is still based on the fact that the contract is legally or physically enforceable, otherwise it is not credit, it is mutual trust and mutual trusts are not enforced like legally binding agreements are for the simple reason that neither party wants to enforce it because it goes against their culture or principles (for instance the Eskimo episode in Graeber's Debt: The First 5000 Years was based on mutual trust, not some enforceable agreement), or because there is no property ownership and hence no legal enforcement is possible (only physical). In a nutshell, any form of credit which is intended to be enforced creates property. I am not sure how a socialist model is able to get away with operating without enforcement, particularly when it is obvious even now many people wont want to be a part of it.

This is in the 'sources' section of the Bank of Englands 2014 paper 'Introduction to Money' pg 4, note (4):

The importance of a lack of trust as a necessary condition for the existence of money
is emphasised in papers by Kiyotaki and Moore (2001, 2002), who famously argue
that ‘evil is the root of all money’. Kocherlakota (1998) points out that a lack of a
record of all transactions is another necessary condition. Earlier work by Brunner and
Meltzer (1971) and King and Plosser (1986) also argues that there must be some
impediment to stop a credit system being used instead of money.

What this demonstrates is that there is a clear distinction between enforcing agreements and operating under mutual trusts. I cannot see how the term 'credit' can fit into the latter unless the intent is not to enforce the debt when credit when is extended, which then renders it not as creditor/debtor relation (nor as property) but as trust relation; and as I said before, any form of credit which is intended to be enforced creates property, not trust.

Is it possible to see the existence of monetary profits outside of debtor/creditor relations? I can't

ANC Driver said...

"It's also possible to conceive of a scenario with no credit and yet some profit in a system based on real exchange, although I am not aware of any historical examples since credit has been pretty universal.

Assume that some workers are self-employed in prospecting for bullion.

They exchange bullion for goods made by other workers employed by owners of the means of production.

All goods sold are owned by the owners of the means of production for bullion, who get bullion in exchange for goods and pay their workers in bullion for producing all the goods for sale.

The owners of the means of production, having a monopoly on production, adjust price and quantity so that after all goods are exchanged for bullion, there is bullion left over as profit."


I assume the bullion only has value if it can be used to pay taxes, can be lent and borrowed at interest, and can be sought as damages for default of contract or breaking of laws, all of which are legally binding relations. Unless it fits these three then why would anyone exchange anything for it, let alone accumulate it unless they had no taxes to pay, never had to borrow, and never had to enter into any legally binding agreements, which is impossible? I certainly wouldn't exchange anything for it.

Tom Hickey said...

I assume the bullion only has value if it can be used to pay taxes, can be lent and borrowed at interest, and can be sought as damages for default of contract or breaking of laws, all of which are legally binding relations. Unless it fits these three then why would anyone exchange anything for it, let alone accumulate it unless they had no taxes to pay, never had to borrow, and never had to enter into any legally binding agreements, which is impossible? I certainly wouldn't exchange anything for it.

Because gold from the earliest times had a "magical" quality to it that made it desirable in itself over other real goods. In fact, some primitive people believed it to be divine. Silver, too. Thus, bimetallism.

Gold ornaments were a symbol of wealth as they are today, especially in some countries like India. Therefore, gold attracted beautiful women to the possessor.

Intergroup trade was often conducted in the metals, and later became the basis of international trade. This only ended in 1971, when Nixon shut the gold window. Central banks still hold it however, since is still considered a money equivalent, or even the at the apex of the hierarchy of money although no longer officially.

While the example I gave above was idealized in terms of the initial assumptions, it did apply in a way to mercantilism, imperialism, and colonialism. Columbus's ships and voyage were finance on the expectation of obtaining gold.

Tom Hickey said...

Other than simple credit based on trust, e. g. someone lends a tool and expects to get it back in the same condition within a specified period or at least a reasonable one, there is no credit without a corresponding debt, since credit creates an asset and a corresponding liability in the same unit of account. This also assumes some accounting records and a designated unit of account in order to keep score.

According to Graeber, the first exchange was in terms of gift rather than barter of real goods or use of either a standard commodity like bullion, or else credit as currently understood. At this stage there was no formal notion of property, although gifting included a notion of reciprocity. This was likely the way the subsequent idea of credit began as a tacitly understood responsibility to reciprocate rather than an explicit promise or contract.

Property ownership requires an explicitly acknowledged system of rights that implies some kind of institutional arrangements. This began with customs and was later formalized in laws and contract.

I would say that it is not possible to have modern money without formal institutional arrangements including a law of title and contract, which implies a developed notion of property, ownership rights and transfer procedures. This would be a necessary condition to create trust among parties that are not otherwise socially interdependent, or an extra-judicial system like Mafia "credit."

MMT economists hold that imposition of taxation which implies law, enforcement and penalty, a sufficient condition for creating demand for a currency. They do not hold it is a necessary condition. But historically modern money has generally been correlated with imposition of levies such as taxes, fees and fines payable only in the designated unit of account that the issuer controls as the sovereign.

ANC Driver said...

Because gold from the earliest times had a "magical" quality to it that made it desirable in itself over other real goods. In fact, some primitive people believed it to be divine. Silver, too. Thus, bimetallism.

In my studies of the early history and formation of the Roman republic it was suggested that precious metals were seen back then as having very potent healing properties and hence the reason they were so sought after.

ANC Driver said...

Other than simple credit based on trust, e. g. someone lends a tool and expects to get it back in the same condition within a specified period or at least a reasonable one, there is no credit without a corresponding debt, since credit creates an asset and a corresponding liability in the same unit of account. This also assumes some accounting records and a designated unit of account in order to keep score.

I would say that it is not possible to have modern money without formal institutional arrangements including a law of title and contract, which implies a developed notion of property, ownership rights and transfer procedures.


You have basically repeated everything I said. Although I don't accept that money is modern in any sense of the word. Money is and always has been a record of account.

Tom Hickey said...

You have basically repeated everything I said. Although I don't accept that money is modern in any sense of the word. Money is and always has been a record of account.

That is the MMT position, and evidence of accounting extends back to Sumer, the earliest known civilization, which flourished in Mesopotamia, lying between the Tigris-Euphrates rivers (ironically, in an area where war is now raging). Mesopotamia is known as "the cradle of civilization," although there is also evidence of ancient cites that were located in what is now Iran, India and China.

I am a legalist and institutionalist regarding money and I don't think it makes sense to talk about "money," other than its photo-history, without reference to a relative formal institutional structure to support it. But it is difficult to pin point when custom becomes sufficiently formalized to mark the transition from "primitive" to "modern," which is a different distinction from ancient-medieval-modern.

Money, law, property, contract and other such notions did not appear out of nowhere but developed over a lengthy period historically. What may have been tally sticks date back 30,000 years.

There was a hugely significant pivot point in history in around 600 BCE, called the Axial Age. This is around the time that coinage began to proliferate. 'Money" was already a developed concept by then. See the Wikipedia summary of the history of money. "State money" was formalized around this time.


Significantly, the Axial Age marked the transition from mythological account to rational explanation in terms of conceptual models instead of narratives.This made institutionalization more coherent. Concepts that were previously inchoate began to be specified explicitly in relation to systems at this time. Money was not an isolated concept but part of a cultural system, hence socially embedded.

While money undoubtedly had long a history of development before institutional arrangements were formalized enough to provide historical evidence, what led up to such arrangements is a matter of speculation and the subject of just-so stories. Once money was institutionalized this became a matter of evidence rather than speculation. Same with related issues and concepts like property, transfer of title, contract and enforcement.

The institutionalization is now so highly refined that it has become sufficiently complicated to generate debates over what money is and how it works. MMT seems to me to have the clearest and most grounded account of this, but it is based on a lot of work by a range of scholars and thinkers rather than being entirely original.

But I also think that claiming that money is only a unit of account or chiefly a unit of account would be insufficient. Meaning depends on context, and "unit of account" is too non-specific if taken independently of context.

A big issue is whether money plays a role in a circular system that is constructed on a pragmatic basis, or is founded on and grounded in something real, like gold or bimetallism, or labor time, as a real "anchor." Another why to put this is in terms of the hierarchy of money. It is the top tier a construct like state money or is it something real, like gold.

According to MMT, that would depend on the choice of monetary system as a construct rather than "nature," gold being "natural money," for instance.

Tom Hickey said...

See L. Randall Wray, From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy (Levy, 2014) for the MMT POV.

Tom Hickey said...

BTW, I agree that "modern" was not a good choice of terms, along with "theory" when naming MMT. Unhelpful and potentially confusing. It was also a poor choice strategically, You don't want to start off having to defend your name. But that is water over the bridge now.