Kmarinas86's note: Social Credit is inflationary because it assumes that B>0. If we set B=0, as per my proposal in the opening post of this thread, then this inflationary pressure is eliminated. Furthermore, to avoid repeating the same confusions people have had concerning the A+B theorem, I have provided a more precise definition as to what A and B really are.
A is....
A = rate of return to various people (e.g. workers, leaders, investors, etc.) on spending performed by spenders (e.g. customers, individual buyers, other businesses, etc.)
B is....
B = rate of building up capital in the balance sheets of firms
Both A and B are defined flows, as per example in the opening post:
Consider the case of a microeconomy.
Let A = $500 / month
Let B = $100 / month
Now for a good article on Douglas's A+B Theorem:
http://social-credit.blogspot.com/2007/10/douglass-ab-theorem.html
Douglas's A+B Theorem
By: Socred - B.A., SCMP
Douglas’s A+B theorem is probably the most simple, yet most controversial, of all of Douglas's ideas. Oftentimes, too much emphasis has been placed on this theory amongst Social Crediters themselves, but the theory itself is essential for understanding Douglas’ monetary policies. The theorem is a truism; however, the controversy lies in the nature of the “B payments” which Douglas identified. The theorem is stated by Douglas as follows:
Douglas was an engineer, and a cost accountant.. As a scientist, he started with an observation, and formed a hypothesis. This is different than many orthodox economists who form a hypothesis, and then try to make the facts fit their theory. Douglas’ A+B theory is a simple statement of fact, and the accounts of any business will verify this fact. The confusion amongst orthodox economists lies in the nature of the B payments, and what causes them.
The critics of the theory generally fall into two categories by arguing: 1) B payments are really income, so there is no differentiation between A and B payments or 2) B payments are either past, or future, income. Let’s address both these criticisms individually.
The first criticism, which states that B payments are income, implicitly assumes the quantity theory of money. According to this theory, all money received by firms is income and can be used to purchase other goods and services. The theorem states that the quantity of transactions, multiplied by the quantity of money, equals total purchasing power. On the surface, this theory seems to make sense, but upon further investigation, it is not a reflection of reality. In reality, firms have costs that must be repaid. These costs can ultimately be traced back to bank debt because all money originates as debt. If a company receives $10 for its product, and assuming accumulated costs of $8.50 to acquire and sell this product, then only $1.50 is actually profit to the company, and potential income. The $8.50 must be used to cancel debts, or replace working capital. All of the $10 received by the company is not income. The fallacy was pointed out in "The Alberta Post-War Reconstruction Committee Report".
The truth is that money does not “circulate” but instead operates in an accounting cycle, and B payments are monies on their way back to the bank, thus completing the cycle. Therefore, B payments do not exist as income to anyone. Income, by contrast, is flowing from the bank, and reaches individuals through the media of wages, salaries, and dividends. The argument that B payments are income is a complete fallacy based on the erroneous assumption that the circulation of money increases its purchasing power.
The second criticism, which has more credibility, will be seen to be a complete fallacy when the concept of time is introduced. Although not all B payments represent previous, or future, income (something we will touch on later), it is true that a proportion of the B payments are represented by past and future incomes. However; income and prices must be regarded as flows, and as Douglas stated:
It is obvious that future incomes cannot be used as present incomes (excluding momentarily credit from an extraneous source, which is a mortgage on future incomes). These future incomes are profits (interest on loans representing bank profit), which become future incomes via dividends paid to individuals. The fact that profits partially cause the gap between income and prices forms the supposed justification for the socialist argument against profits. However, nobody will do something unless it in some sense of the word profits him. Also, profits only represent a portion of the gap between income and prices. Douglas did not seek to eliminate profits, instead he wanted to compensate for the gap between income and prices which profits helped create.
Past income used for consumption represents a substantial portion of the gap between income and prices. The belief that incomes disbursed in the past for capital production are all saved up in order to defray the costs associated with those incomes as they make their way into the cost of future consumer goods is a complete fallacy. People tend to spend their income on consumer goods in a relatively expeditious fashion. This money is collected from the consumers by businesses through the agency of prices. The upper limit of prices being governed by the laws of supply and demand, or what the item will fetch. This income, recollected by businesses, forms a part of their profit, assuming they can sell their product above cost. These profits can be distributed as income in the form of dividends, but is most often re-invested back into the company, and therefore, do not exist as income to anyone.
Therefore, it can be seen that the criticisms of the A+B theorem are based on the fallacy known as the quantity theory of money, or they fail to take into account the effect of time on income and prices (i.e. they are static). Incomes and prices are flows, and any analysis into their nature must account for the dimension of time. Since prices include all payments made to individuals as income (A), as well as all overhead charges (B), we must understand what causes these overhead charges in order to understand why prices rise faster than incomes when regarded as a flow.
The cyclic rate of purchasing power of money can be calculated by calculating the average amount of deposits held by depositors in banks relative to the amount of clearings through the banks, minus the amount of "Butcher-Baker" transactions. Douglas referred to any transaction that broke a chain of repayments as a "Butcher-Baker" transaction. When a butcher receives money for his product from his customer, he must repay debts owed to the slaughterhouse for the meat, who in turn must pay debts owed to the farmer, who pays debts to the banker (all money originating from the bank as a debt). If the butcher buys bread from the baker with the money he has received from his customer, then he has broken the chain of debt to the slaughterhouse, farmer, and ultimately the banker; and therefore, these transactions leave a trail of debt, and must be deducted when calculating the cyclic rate of purchasing power, because the monetary cycle has not been completed. Douglas calculated the average cyclic rate of purchasing power to be approximately two and a half weeks in Britain ("The Old and the New Economics”). Therefore; any cost anterior to three weeks, must form a part of the gap between income and prices. Douglas spoke of this fact when questioned before the Alberta Agricultural Commission.
Now all business in the world at the present time is carried on on the theory of the balanced budget, including governmental business. Therefore, you must have a right, or period of cycle through which this money which starts from the banks goes out through cost and comes back again to the banks through the agency of price; there must be a time that that cycle takes. Now we have as a matter of fact means of calculating that time, and in Great Britain the average is somewhere in the neighbourhood of around about three weeks. Now, so long as a charge is incurred and liquidated inside that period of three weeks it can be liquidated by that cycle of the flow of purchasing power, starting from the banks, going out through costs and coming back again through prices. So long as the whole transaction of costs and prices is involved in a period of about three weeks, there is no difficulty involved in the prices and the costs being equal, but any item of cost which is outside that period of three weeks we will say cannot be liquidated by that stream of credit which is constantly in circulation at a period rate, we will say of three weeks.
Now we know there are an increasing number of charges which originated from a period much anterior to three weeks, and included in those charges, as a matter of fact, are most of the charges made in, respect of purchases from one organization to another, but all such charges as capital charges (for instance, on a railway which was constructed a year, two years, three years, five or ten years ago, where charges are still extant), cannot be liquidated by a stream of purchasing power which does not increase in volume and which has a period of three weeks. The consequence is, you have a piling up of debt, you have in many cases a diminution of purchasing power being equivalent to the price of the goods for sale. It is frequently said, "Your theory must be absurd because we know that there are periods in which purchasing power is in excess of the price of the goods for sale, for instance at the end of a war." What people who say that forget is that we were piling up debt at that time at the rate of ten millions sterling a day and if it can be shown, and it can be shown, that we are increasing debt continuously by normal operation of the banking system and the financial system at the present time, then that is proof that we are not distributing purchasing power sufficient to buy the goods for sale at that time; otherwise we should not be increasing debt, and that is the situation." (C.H. Douglas, "Douglas System of Social Credit", evidence taken by the Agricultural Committee of the Alberta Legislature 1934)
If money disbursed for production makes its way to the bank before its cost can be extinguished in the price of the consumer goods it creates, then there is a corresponding gap between income and prices. If income is reinvested back into the productive system, then each time it is re-invested, it creates a new cost without creating new purchasing power (we have already seen that money does not circulate, but cycles, so money is only capable of cancelling one cost). The income I receive in terms of wages or salaries has been debited to the cost of some good or service. If I invest my income, then I expect to receive my investment back, with a rate of return. The only way the company I invested in can give me my money back with a rate of return is by charging the consumer through prices. Therefore; my income has created two costs: 1) the cost associated with the good or service that I helped provide, and 2) the cost associated with the investment that must be returned to me. However, my income can only cancel one of those costs. There is now a new cost created, without the creation of new purchasing power.
The reappearance in prices of the same sum of money several times creates a gap between purchasing power and prices. The re-investment of savings causes the reappearance in prices of the same sum of money, and the more production is split up into a large number of processes, the greater the probability that income disbursed in capital production will be reinvested. Douglas listed five causes of the gap between prices and purchasing power in "The New and The Old Economics":
1. Money profits collected from the public (interest is profit on an intangible)
2. Savings, i.e., mere abstentation from buying
3. Investment of savings in new works, which create a new cost without fresh purchasing power
4. Difference in circuit velocity between cost liquidation and price creation which results in charges being carried over into prices from a previous cost accountancy cycle. Practically all plant charges are of this nature, and all payments for material brought in frm a previous wage cycle are of the same nature.
5. Deflation, i.e. sale of securities by banks and recall of loans" (C.H. Douglas, "The New and The Old Economics")
We have already discussed at length reasons 1, 3, and 4. Reasons 2 and 5 are pretty much self-explanatory, both being a reduction in A, and not the creation of B costs. Add to all this the fact that overhead charges are growing in relation to income (i.e. B is increasing relative to A), due to the fact that capital is replacing the need for labour in the productive process, and it is apparent that the gap between income and prices is ever increasing, and this problem is ever worsening.
What does this mean? If A+B must expand with every improvement of process in order to keep A, and the goods purchased with A ,at a constant value, and if A+B represent prices, then prices must expand with every improvement in process. This is why certain periods of time, when people have enough income to purchase most goods coming onto the market, are met with rising prices (i.e. inflation). Inflation is generally not caused by too much income chasing too few goods, but is caused by the ever increasing expansion of overhead costs via advancing technological processes. This means that inflation is inherent in our economic system, unless credit from an extraneous source is used to decrease, or stabilize, prices.
Please understand that the concept of "Social Credit" is woefully inadequate, especially when we take into consideration the implemenation of new technologies that may possibly increase B over A. Social Credit would require the issuance of ever larger, gigantic sums of money. Issuance implies an issuer. The issuer ends up attracting corruption and competition from "private bankers". Even if the money were held in a legitimate public trust for a period of time, even during that period of time the money supply is inflated even in the case economic stagnation. Independence of production from "labor" will only exacebate such trends. My proposal eliminates the need to print additional money in order to stimulate the economy. Lack of new credit (lack of source of B) does not need to lead to any austerity crises. We seriously need to re-evaluate what it means to have ability to pay. Does it have to be "money" as we know it today, or can it be something completely better?
Theoretically however, it should be possible to operate the whole economy with B=0. Such a condition would require none of us to print or create new money ever again in order to make the economy work. This solves the question, "Who should create money?"; now that money already exists in circulation, the answer to the question is, "No one." This would eliminate the element of corruption that goes hand-in-hand with money issuance. No angels required. It would also be the literal realization of a sustainable economic model, where spending supports all, and not just some, of the income relevant to maintaining that level of spending.
Such is not possible to make reality until we come to the realization that "balance sheet"-type accountancy is simply unpracticable in a model where B=0.
When B=0, if customers spend $600 / month, then workers, leaders, and investors will earn $600 / month. Likewise, if workers, leaders, and investors earn $600 / month, then they must spend $600 / month. As you can see, if B=0, money that moves must keep moving, while money that does not move simply does not participate in the economy any more. In other words, new money no longer stays in the books; what goes in must go out immediately (in real time) the same rate that it came in. If you believe that it is hard to manage, it's not if we exchange goods and services with the proper currency, which is thankfully possible now due to the recent development of ever faster calculators and speed-of-light communication worldwide. Furthermore, the calculations required to make B=0 are quite simple. We are not talking complicated college mathematics used by elite derivatives trading software, but elementary grade Pie-chart math.
The proper currency in this case would not be an accumulation as "money" is today. The proper currency would be a rate or cash flow. In other words, we would:
Buy and sell in cash flow
Value homes, services, product lines and maintenance in cash flow
Pay each other in cash flow
Make bets, offers, etc. in cash flow
Deposit cash flow into our bank accounts
Withdraw cash flow from our bank accounts
Coinage new physical currency with denominations of cash flow
Write out the amount of new mortgages in cash flow
Write checks of amounts in cash flow
Pay for subscription access to stores' services with cash flow
Provide and receive wages, salaries, tips, commission, and layouts in cash flow
For the reason is that if B=0, value must be connected to a rate, not an accumulation.
This is not the complete description however. One must also consider the need to make ends meet. This is astonishingly easier if all our commerce and other transactions are dealt exclusively with cash flow as a commodity in of itself. It is astronomically easier, then, if what we pay to others in cash flow are derived as percentages of our incoming cash flow, under the provision that the total percentage is mathematically valid (i.e. 100%).
One can think of the water in a residential community. When water is pumped through pipes, the quantity of water inside the pipes does not change, however, the volume of water changes with demand, and water flows out of the pipes at the same rate that it flows into the pipes. This is because water behaves as an incompressible fluid (density remains unchanged). When more faucets are turned on inside the same community, the water pressure decreases for the whole community, but the volume of water is also greater. If a house having one water inlet pipe has more faucets on, the same occurs: pressure decreases and volume increases. † Volume then becomes analogous to the number of services being utilized, while pressure becomes analogous to commitment to pay for each service.
Implementing this proposal will allow for arbitrarily large ratio of GDP to money supply. The money supply no longer acts as a straightjacket as people issue their own cash flow credits.
Caption:
Issuing a cash flow credit via a "Cash Flow Token" check is nothing more than securing a recurring money transfer that you can write in the same way you can write a check. Other forms of "Cash Flow Tokens" would include exchangeable coinage of $x / month denomination, and even digital forms. Issuance of cash flow credits does not create new money. It formalizes, tokenizes, and commodifies cash flow as an entity in of itself. Thus, it constitutes a form of economic stimulus without the problems that come with: 1) borrowing money from foreign markets, and 2) issuance of new money such as credit owed as debt to a central bank.
Instead of being paid $8 per hour, one is paid according to a share of revenue generated. For very small companies, this could be, for example, 5% of revenues (5 parts in 100, or 10 parts in 200, etc.). If the company grows, this percentage will be automatically adjusted (example: 5 parts in 200, or 10 parts in 400, etc.). For very large companies, the percentage would be very small (e.g. 5 parts in 1,000,000, or 10 parts in 2,000,000, etc.). Shares are added every time stakeholders are added or when these stakeholders demand an increase in their shares. Operating a business in this manner can provide a means of a vastly simplified accounting system, one that allows for real-time actual accounting and budgeting, as opposed to projection-based weekly, monthly, or quarterly accounting and budgeting. Personal spending can be done similarly; when B=0 on the personal side of things, in addition to the business side of things, all money that is personally received in a period also can also concomitantly sustain existing commercial, industrial, and organizational revenue flow, allowing a steady-state economy to become possible in the first place. B can be set equal to zero in functioning economy.
The mathematics of this scalable budget allocation model is far less unpredictable than models with unscalable economic processes. The model I propose promises the possibility for vast simplification, commoditization, utilitification, and automation of accounting and financial processes because when B=0, when spending is arrived at by real-time shared allocation of revenue streams, one does not have any reason to track transactional actions (such as clearing checks, bouncing checks, ID verification, writing daily tills into journal entries etc.), for problems such as check bouncing would simply not exist in this model. Again, the money that is rendered by an entity in a given period of time is, by allocation predefinition, equal to the money that is received by that entity in that same period of time. The cost overhead removed from the accounting and financial system can be reallocated to industries that serve the comfort of humanity, such as hospitality, travel, entertainment, and other recreational services, in manner consistent with longer, more economically-productive vacations as opposed to less productive traditional government subsidized-health benefits. The values associated with this model entails that a degree of awareness is attained concerning the mechanism of economic strifes and the value that can be achieved by eliminating such issues.
Consider the case of a microeconomy.
Let A = $500 / month
Let B = $100 / month
If:
rate of spending in the economy = A + B
and:
rate of building up capital (profit) = B
Then:
B = rate of building up capital in the balance sheets of firms
A = rate of return to various people (e.g. workers, leaders, investors, etc.) on spending performed by spenders (e.g. customers, individual buyers, other businesses, etc.)
Now let's say we decide to draw upon the capital reserves, without incurring a loss on the balance sheet of firms.
This is equivalent to increasing A and decreasing B, without B going negative.
Say A increases to $540 / month and B drops to $60 / month.
A+B, the rate of spending in our micro-economy, is still $600 / month.
But if A, $540 / month, is what is earned by workers, leaders, investors, etc., then A is still less than what is required to support A + B, which is still $600 / month.
But we already know that B is what is not earned by the workers, leaders, investors, etc..
It is simply the rate of money being absorbed into the books.
It is simply the rate that new money has to be introduced into the economy to merely maintain the present rate of economic circulation.
Where is it introduced?
If it is anything like the banker bailouts, often enough it goes directly to B. It gets absorbed into the books.
If it is anything like a housing boom, it goes to A+B, where A includes all those workers, leaders, and investors that benefit from construction and interest on payments of financial obligations, and B is the portion that gets absorbed into the books.
So it is clear that legitimate book profit will exist if and only if B > 0, but B > 0 if and only if A < A + B... and A < A + B if and only if A is insufficient to cover the value of A + B.
What does this mean?
the rate of money being absorbed into the books = the rate that new money has to be introduced into the economy to merely maintain the present rate of economic circulation
Aside from consideration of the fact that new money introduced into the economy finds its way into the balance sheet, the important result here is that:
Book profit is the reason why ends are not met for the vast majority of people!
"Book profit" is to speed in the same way that "Book value" is to distance. "Book profit" is a rate, which is accurate. However, "Book value" today is not treated as a rate but an accumulation. The fact that "Book value" is defined in our society as not rate but an accumulation is the main source of economic hardship worldwide.
Now it is clearly evident that our attempts to stimulate the economy to maintain A+B requires that, averaged over time, a rate of money B must be injected into the economy. Where and how this money is introduced ultimately produces corruption.
Theoretically however, it should be possible to operate the whole economy with B=0. Such a condition would require none of us to print or create new money ever again in order to make the economy work. This solves the question, "Who should create money?"; now that money already exists in circulation, the answer to the question is, "No one." This would eliminate the element of corruption that goes hand-in-hand with money issuance. No angels required. It would also be the literal realization of a sustainable economic model, where spending supports all, and not just some, of the income relevant to maintaining that level of spending.
Such is not possible to make reality until we come to the realization that "balance sheet"-type accountancy is simply unpracticable in a model where B=0.
When B=0, if customers spend $600 / month, then workers, leaders, and investors will earn $600 / month. Likewise, if workers, leaders, and investors earn $600 / month, then they must spend $600 / month. As you can see, if B=0, money that moves must keep moving, while money that does not move simply does not participate in the economy any more. In other words, new money no longer stays in the books; what goes in must go out immediately (in real time) the same rate that it came in. If you believe that it is hard to manage, it's not if we exchange goods and services with the proper currency, which is thankfully possible now due to the recent development of ever faster calculators and speed-of-light communication worldwide. Furthermore, the calculations required to make B=0 are quite simple. We are not talking complicated college mathematics used by elite derivatives trading software, but elementary grade Pie-chart math.
The proper currency in this case would not be an accumulation as "money" is today. The proper currency would be a rate or cash flow. In other words, we would:
Buy and sell in cash flow
Value homes, services, product lines and maintenance in cash flow
Pay each other in cash flow
Make bets, offers, etc. in cash flow
Deposit cash flow into our bank accounts
Withdraw cash flow from our bank accounts
Coinage new physical currency with denominations of cash flow
Write out the amount of new mortgages in cash flow
Write checks of amounts in cash flow
Pay for subscription access to stores' services with cash flow
Provide and receive wages, salaries, tips, commission, and layouts in cash flow
For the reason is that if B=0, value must be connected to a rate, not an accumulation.
This is not the complete description however. One must also consider the need to make ends meet. This is astonishingly easier if all our commerce and other transactions are dealt exclusively with cash flow as a commodity in of itself. It is astronomically easier, then, if what we pay to others in cash flow are derived as percentages of our incoming cash flow, under the provision that the total percentage is mathematically valid (i.e. 100%).
One can think of the water in a residential community. When water is pumped through pipes, the quantity of water inside the pipes does not change, however, the volume of water changes with demand, and water flows out of the pipes at the same rate that it flows into the pipes. This is because water behaves as an incompressible fluid (density remains unchanged). When more faucets are turned on inside the same community, the water pressure decreases for the whole community, but the volume of water is also greater. If a house having one water inlet pipe has more faucets on, the same occurs: pressure decreases and volume increases. † Volume then becomes analogous to the number of services being utilized, while pressure becomes analogous to commitment to pay for each service.
The problem with our present economy is that it behaves more like the throes of people living hostile living conditions who must carry water by the sweat of their own brow, people who must go back and forth many miles merely to get water from the same wells that others within miles of them are going to.
Similarly, people all over the world, regardless of economic status, have confrontations with money imbalances. People are living "from paycheck to paycheck" in the same way some people are still subsisting on living from "handout to handout" or "water well to water well". Money in our economy today behaves much analogously to a compressible fluid. The amount of money in a household fluctuates as a results of the mismatch between money flowing in and money flowing out, causing much economic and class struggle, similar to how variations of density of air in the atmosphere contain the potential energy to wreak stormy havoc on our world's inhabitants. This creates incentive for people to work hard to make a living. But is this harder and not smarter?
If money behaved as an incompressible commodity, it can be shown that the struggle itself is completely unnecessary and not, as some schools of thought have suggested for ages, an unavoidable result of the frailty and imperfections of the human condition. Such an incompressible commodity exists when value is derived from the volume or circulation and not at all by the amount that is stored.
When dealing with an incompressible form of money, if a person obtains a regular source of revenue, then that money may be divided across as many services as he or she chooses. Any money that is hoarded does not exist as incompressible money, and lack of acceptance of the compressible form of money, which is what hoarded money is, renders it functionless and thus not an element to consider when predicting what will happen in an economy based solely on incompressible money. The rule of this game, incompressibility, implies that the money earned by others remains incompressible, which means it too must be passed on to others at the same rate. Those who earn more will wield a larger river of money, but this incompressible form of money has to be spent as soon as it is received, just like how the volume of water is to delivery pipes in a neighborhood. The incentive for everyone interested in their own personal economic well-being is to increase their own share of the economies' streams.
In the analogy to the vector calculus of fluid dynamics, the divergence of cash flow is zero in a balanced economy. This statement might excite some physicists and fans of the show The Big Bang Theory, but it has profound economic and social implications when understood.
For example, there is no budget deficit and no budget surplus in an economy operating solely on an incompressible form of money, whether we are talking about individuals, businesses, or the government. The nominal trade balance would be perfect and exact at all levels. This does not assume total perfect economic equilibrium of goods and services which are rendered in exchange for maintaining a cash flow, for people are free to switch between different providers, in analogy to how people can choose to use a different sink to wash their hands in, even when the difference of the cost between them is of no significance.
Furthermore, the stolen hoards of money in its various forms would cease to be relevant, except in conditions where it has intrinsic value, such as real gold, in which case can be traded in exchange for cash flow or any other asset, as long as it is not a lump sum of currency, for exchanges in lump sums of currency are the product of the compressible form money that requires B stray from 0.
As market efficiency tends to increase with accurate anticipation of future values, an economic system based on incompressible money will be far more efficient than our current system of compressible money due elimination of the complicating impact that the nominal values of accumulations have on economic forecast models. A more efficient market also has lower "natural rates of interest" and thus "less usury", as most economic theories will agree with.
As I conclude these paragraphs, I invite inquiry as to my choice for the title of my message, "Simple A + B Math. Why book profit is the cause of systemic usury." Unlike in previous threads which I posted at PeakProsperity.com, I did not immediately set out to say in the title what I believe to be the conceptual framework for a workable solution, a solution I have been trying to conceive of for quite a while.
As with any opinion, especially when it comes to novel ones, there are supporters, critics, and the dispassionate. I believe that this time I made a more cogent argument that I believe will resonate with more people, and that with this new description they would be better equipped to understand where I am coming from and why I think this kind of concept is important.
Signed,
Kmarinas86
___________
† In strict theoretical terms I refer to is actually static pressure and flow, not pressure and volume. However, speaking in economic as well as mechanic lingo, calling the flow a "volume" is easily comprehended and appreciated.