Incor­po­rat­ing energy into pro­duc­tion func­tions

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In my last post on my Debt­watch blog, I fin­ished by say­ing that the Phys­iocrats were the only School of eco­nom­ics to prop­erly con­sider the role of energy in pro­duc­tion. They ascribed it solely to agri­cul­ture exploit­ing the free energy of the Sun, and specif­i­cally to land, which absorbed this free energy and stored it in agri­cul­tural prod­ucts. As Richard Can­til­lon put it in 1730:

The Land is the Source or Mat­ter from whence all Wealth is pro­duced. The Labour of man is the Form which pro­duces it: and Wealth in itself is noth­ing but the Main­te­nance, Con­ve­nien­cies, and Super­fluities of Life. (Can­til­lon, Essai sur la Nature du Com­merce in Général (Essay on the Nature of Trade in Gen­eral)

Quesnay’s famous but neglected “Tableau Economique” there­fore described the agri­cul­tural sec­tor as “the pro­duc­tive sec­tor” and man­u­fac­tur­ing as “sterile”—see Fig­ure 1.

Fig­ure 1: Quesnay’s “Tableau Economique”, first drafted in 1759, two decades before Watt’s steam engine

This was a jus­ti­fied asser­tion at the time, given that the Phys­iocrats wrote before the Indus­trial Revolution—and in par­tic­u­lar the wide­spread exploita­tion in man­u­fac­tur­ing of stored solar energy in fos­sil fuels– and orig­i­nated in France, which was then over­whelm­ingly a rural nation.

Smith, who was influ­enced by the Phys­iocrats and wrote in Britain when indus­try was start­ing to exploit fos­sil fuels (specif­i­cally coal) on a grand scale, could have cor­rected this over­sight. But rather than fol­low­ing the Phys­iocrats’ lead on energy, Smith instead saw labour—not energy—as the font of wealth (which he described in the same terms as Can­til­lon: the “con­ve­nien­cies of life”), and ascribed the increase in pro­duc­tiv­ity over time to “the divi­sion of labour”:

The annual labour of every nation is the fund which orig­i­nally sup­plies it with all the nec­es­saries and con­ve­nien­cies of life which it annu­ally con­sumes, and which con­sist always either in the imme­di­ate pro­duce of that labour, or in what is pur­chased with that pro­duce from other nations…

The great­est improve­ment in the pro­duc­tive pow­ers of labour, and the greater part of the skill, dex­ter­ity, and judg­ment with which it is any­where directed, or applied, seem to have been the effects of the divi­sion of labour. (Smith 1776, An Inquiry into the Nature and Causes of the Wealth of Nations)

Eco­nom­ics thus lost the Phys­iocrats’ focus on energy, and instead descended first into the “Labour the­ory of value” and then into the Neo­clas­si­cal (and Post Key­ne­sian) notions of “pro­duc­tion func­tions” in which energy played no role at all.

The abid­ing weak­ness of all schools of eco­nom­ics, ever since the Classicals—including today’s Neo­clas­si­cal and Post Key­ne­sian schools, which are nor­mally at pains to point out how supe­rior one is to the other—is this fail­ure to acknowl­edge the key role of energy in pro­duc­tion. In this brief note, I want to record some spec­u­la­tions about how mod­ern math­e­mat­i­cally-inclined eco­nom­ics, with its use of pro­duc­tion func­tions, might be made as energy aware as the Phys­iocrats were two and a half cen­turies ago. For the sake of non-math­e­mat­i­cal read­ers, I’ve put the equa­tions in an appen­dix at the end of this post.

Post Key­ne­sian mod­els typ­i­cally see Out­put (Y) as a func­tion of Cap­i­tal (K) with a fixed ratio (v) between Cap­i­tal and Out­put, and a fixed ratio (a) between Out­put and Labour (L) (see Equa­tion 1).

When they go fur­ther than “corn econ­omy” mod­els, they employ a so-called “Leon­tief pro­duc­tion func­tion”, in which the ratio between cap­i­tal and labour is fixed in each indus­try, though it varies between indus­tries.

Neo­clas­si­cal econ­o­mists crit­i­cise this approach because it ignores the sub­sti­tutabil­ity of cap­i­tal and labour in pro­duc­tion, which they embody in their core con­cept of an “iso­quant” which alleges that the same level of out­put can be pro­duced by very dif­fer­ent com­bi­na­tions of labour and cap­i­tal. Post Key­ne­sians nor­mally respond that this sub­sti­tutabil­ity is a chimera, and con­tinue using this “fixed coef­fi­cients” model of pro­duc­tion any­way.

Neo­clas­si­cals typ­i­cally see out­put as a func­tion of cap­i­tal and labour where one can be smoothly sub­sti­tuted for the other. Their canon­i­cal model is the Cobb-Dou­glas Pro­duc­tion Func­tion with con­stant returns to scale (Equa­tion 2).

Neo­clas­si­cals tout this model’s fit to empir­i­cal data as a strength; Post Key­ne­sians note that this is sim­ply the result of account­ing iden­ti­ties, since this “pro­duc­tion func­tion” can be derived by manip­u­lat­ing the iden­tity that Out­put equals Wages plus Prof­its under con­di­tions of a rel­a­tively con­stant (or slowly vary­ing) dis­tri­b­u­tion of income (see Anwar Shaikh’s bril­liant paper “The Hum­bug Pro­duc­tion Func­tion”).

In this “he said/she said” bat­tle, both sides ignore the shared weak­ness that their mod­els of pro­duc­tion imply that out­put can be pro­duced with­out using energy—or that energy can be treated as just a form of cap­i­tal. Both state­ments are cat­e­gor­i­cally false accord­ing to the Laws of Ther­mo­dy­nam­ics, which—in strong con­trast to so-called “Eco­nomic Laws” like the “Law of One Price” and the “Law of Demand”—can­not be bro­ken. As Sir Arthur Edding­ton once put it:

The law that entropy always increases holds, I think, the supreme posi­tion among the laws of Nature. If some­one points out to you that your pet the­ory of the uni­verse is in dis­agree­ment with Maxwell’s equa­tions — then so much the worse for Maxwell’s equa­tions. If it is found to be con­tra­dicted by obser­va­tion — well, these exper­i­men­tal­ists do bun­gle things some­times. But if your the­ory is found to be against the sec­ond law of ther­mo­dy­nam­ics I can give you no hope; there is noth­ing for it but to col­lapse in deep­est humil­i­a­tion. (Sir Arthur Stan­ley Edding­tonThe Nature of the Phys­i­cal World (1915), chap­ter 4)

Arguably there­fore, the pro­duc­tion func­tions used in eco­nomic theory—whether spouted by main­stream Neo­clas­si­cal or non-ortho­dox Post Keynesians—deserve to “col­lapse in deep­est humil­i­a­tion”.

This unac­cept­able state of affairs has inspired a num­ber of eco­log­i­cally ori­ented econ­o­mists to attempt to come up with pro­duc­tion func­tions in which energy plays a cru­cial role. One such model is the LINEX (“LIN­ear-Expo­nen­tial”) or KLEC (“cap­i­tal-labor-energy-cre­ativ­ity”) model used by Kum­mel, Lin­den­berger, Ayres and col­leagues. At a basic level, this treats out­put as a func­tion of labour, cap­i­tal, energy and time—effectively adding Energy as a third input to the Cobb-Dou­glas model (Equa­tion 3).

While this is an improve­ment on the basic Cobb-Dou­glas model, it still implies log­i­cally that the con­tri­bu­tion of energy to pro­duc­tion could be nil: just set its expo­nent ? to zero. This is still in vio­la­tion of the Laws of Ther­mo­dy­nam­ics: we need a pro­duc­tion func­tion in which energy plays an essen­tial and irre­ducible role.

A poten­tial way to achieve this is to accept that the whole idea of “labour” and “cap­i­tal” with­out energy is a farce: labour with­out energy is a corpse, and cap­i­tal with­out energy is a sculp­ture.

Why not acknowl­edge this by, as an ini­tial abstrac­tion, treat­ing labour and cap­i­tal as both being means to har­ness energy to do work, and treat­ing out­put (Y) itself as work? Then we start from treat­ing Labour and Cap­i­tal as means to har­ness the energy they con­tain: EL for the energy flow that a worker can har­ness in a day, and EK for the energy flow that a machine can har­ness in a day (Equa­tion 4).

The type and amount of energy that a worker or a machine can embody (as flows of energy at a point in time) are of course vastly dif­fer­ent: the for­mer is lim­ited to food, and has a bio­phys­i­cal max­i­mum (say, 5000 calo­ries per day) whereas the lat­ter can be the Sun itself directly, agri­cul­tural prod­ucts, fos­sil fuels, or nuclear energy, and has risen from triv­ial lev­els before the Indus­trial Rev­o­lu­tion to truly astro­nom­i­cal lev­els today.

Unpack­ing this fur­ther, we also need to acknowl­edge that not all the energy embod­ied in labour or cap­i­tal can be used for work. Energy avail­able to do work (these days called “exergy”) is the rel­e­vant fac­tor, rather than the total energy embod­ied in labour or a machine; the effi­ciency with which that avail­able energy is har­nessed is also a vital ingre­di­ent.

So rather than sim­ply show­ing the energy embod­ied in labour and cap­i­tal, we need to mul­ti­ply it by the ratio of avail­able energy (exergy, with ExL for labour and ExK for machin­ery) to energy, and by the effi­ciency with which that exergy is har­nessed . Then, using L to sig­nify the num­ber of work­ers and K (how­ever imper­fectly) to sig­nify the num­ber of machines, we get Equa­tion 5, which treats out­put as a func­tion of labour, cap­i­tal and energy.

Rear­rang­ing Equa­tion 5, we can derive the basic Cobb-Dou­glas for­mu­la­tion for labour and cap­i­tal, times energy inputs. This is super­fi­cially like the Kummel/Ayres LINEX for­mu­la­tion, but it has the advan­tage that the energy con­tri­bu­tion of either labour or cap­i­tal can­not be set to zero with­out set­ting the con­tri­bu­tion of the related “fac­tor of pro­duc­tion” also to zero, since they have the same expo­nents (see Equa­tion 6). Energy there­fore plays a cru­cial role in pro­duc­tion using this for­mu­la­tion: if the energy input is zero, then so is out­put.

It may also tran­spire that the avail­able energy embod­ied in machin­ery, and the effi­ciency of its exploita­tion, is the major expla­na­tion for the “Solow Residual”—the appar­ent para­dox that, despite econ­o­mists see­ing out­put at any point in time as a func­tion of labour and cap­i­tal, the vast major­ity of the change in out­put over time comes not from an increase in the amount of Labour or Cap­i­tal employed, but from the rel­a­tively unspec­i­fied A(t) term in the stan­dard Cobb-Dou­glas func­tion.

With this term replaced by two energy related terms—one of which has a def­i­nite max­i­mum (since there is only so much exergy that a human body can exert in a day, and this can com­fort­ably be treated as a con­stant), the other of which has gone from that of a water wheel in pre-Indus­trial times to that har­nessed by the Spacex Fal­con Heavy today—the “Solow Resid­ual” may turn out to be the expo­nen­tial increase in energy and exergy input into pro­duc­tion over time (see Fig­ure 2).

Fig­ure 2: US Energy con­sump­tion over time

This energy-aware model of pro­duc­tion is just a first step in prop­erly inte­grat­ing energy and the eco­log­i­cal effects of using energy into eco­nom­ics. It does not as yet con­sider the dif­fer­ent types of energy resources, the impact of energy use upon energy resources and the ecol­ogy, or the min­ing (not “pro­duc­tion”) costs of energy in terms of energy itself (the “Energy Return on Energy Invested” or EROEI). But it is nec­es­sary to have a model of pro­duc­tion in which energy plays an essen­tial role to be able to con­sider these issues about the via­bil­ity of our energy usage prop­erly.

Equations

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Tim Ward

    Twowithinthreethatisone’s asser­tion that “as the cost account­ing con­ven­tion that all costs must go into price is never not in effect” is demon­stra­bly false, as exem­pli­fied in com­mod­ity mar­kets recently, oil, met­als, grains etc. When com­mod­ity prices were high, oil $100+, high cost pro­duc­ers were prompted to under­take sig­nif­i­cant cap­i­tal expen­di­tures. Oil dropped, and is below $50. High cost pro­duc­ers, frack­ers, have had seri­ous dif­fi­culty cov­er­ing costs, default­ing on bonds. Energy defaults are now over 25%, 12 mo trail­ing, min­ers are over 15% defaults, 12 mo trail­ing, and HY recov­ery rates are the low­est in his­tory, ~10%. Pro­duc­ers can­not be cer­tain to pass costs on in price, when they do not con­trol commodity/produce prices. Low wheat prices have resulted in increased farm debt defaults and fore­clo­sures. It is not a con­ven­tion that all costs must go into price.

    Like­wise, the asser­tion that “both prof­its and re-invest­ments of same are mon­e­tary diminu­tions to the cir­cu­lar flow of one finan­cial and cost­ing cycle” is also false, as has been explained anal­o­gously by Pro­fes­sor Keen, in the expla­na­tion of how bank inter­est income does not result in the inabil­ity of all debts to be paid. The banks sim­ply spend the inter­est income into the econ­omy, thus the flow and cycle is not inter­rupted. Sim­i­larly, cor­po­rate prof­its do not leave the cir­cu­lar flow, as the cor­po­ra­tions spend the prof­its into the econ­omy on cap­i­tal expen­di­tures, wages, util­i­ties, etc going for­ward. The real prob­lem shows up from for­eign trade deficits, sav­ings desires, money get­ting trapped in the finance sec­tor, cap­i­tal flight, gov­ern­ment sur­pluses, etc, where there really is a flow of money out of the non-finan­cial pri­vate sec­tor that causes prob­lems. The answer is the gov­ern­ment needs to run deficits to counter those demand losses. (&/or banks need to lend into the non-finan­cial pri­vate sec­tor) Prof­itabil­ity per se is not an inter­rup­tion of cycli­cal flow of money. The large polar­iza­tion between the non-finan­cial pri­vate sec­tor and the finance sec­tor is a big prob­lem.

  • twowith­inthree­thati­sone

    Money is basi­cally accoun­tancy which is actual look­ing and record­ing. Abstract the­o­riz­ing is at best once removed from present time real­ity and hence prone to missing/misinterpreting data. 

    I said a long time ago that Prof Keen was cor­rect that (math­e­mat­i­cally) inter­est can be paid. I am not an inter­est crank. But the only way that can be accom­plished is by con­tin­u­ous build up of debt which is prob­lem­atic as Prof Keen has also pointed out. 

    Inter­est is but one of numer­ous ADDITIONAL costs over and above the costs of finance which com­bined in each moment of mod­ern economies cre­ates a flow of total costs that always tends to exceed the flow of total indi­vid­ual incomes. Prices go up and prices go down, but the flow of cost account­ing datums reveals this ratio is the deep­est prob­lem­atic real­ity missed/misunderstood by econ­o­mists.

  • anders.white

    So strange.

    The mul­ti­plic­ity of sci­en­tific dis­cov­er­ies seems to have had lit­tle impact on our species.

    That we’re sim­ply energy con­densed to a slow vibra­tion, that we live on a planet/solar system/galaxy with finite resources, that chaos wins; none of these seem to mat­ter.

    We con­tinue to behave within the con­fines of an indus­trial rev­o­lu­tion mind­set.

  • Rot­toli

    @Professor Keen

    This is the first time I com­ment on your blog and I have to say that I find it extremely inter­est­ing. I also like your idea of incor­po­rat­ing energy but I have some prob­lemes under­stand­ing the final result of the model.

    In fact it seems to me that the final func­tion is not con­sis­tent with con­ser­va­tion of energy but this is prob­a­bly due to my mis­un­der­stand­ing of what the out­put mean

  • Rot­toli

    Con­tin­u­ing from prece­dent

    This is prob­a­bly due to my mis­un­der­stand­ing of what the out­put mea­sured in energy means.

    If it is the total energy con­tained in the final prod­uct I find prob­lems with con­ser­va­tion of energy because the out­put is not equal to the work done by the labour force plus the work done by the machines used. One would expect that the energy in the final prod­uct is equal to the total exergy har­nessed by the labour force and the cap­i­tal minus the losses due to inef­fi­ciency but as I under­stood for­mula 6 is not con­sis­tent with this result.

    I hope pro­fes­sor Keen will find the time to clar­ify my doubt.
    I also apol­o­gize for my poor eng­lish but i’m not anglo­phone..

  • Bhaskara II

    Car­toon with Cap­tion:
    “We’ve been wan­der­ing in the desert for forty years. But he’s a man—would he ever ask direc­tions?”

    http://imagecache5d.allposters.com/watermarker/60–6066-U8ZD100Z.jpg?ch=894&cw=670

  • Bhaskara II

    @ twowith­inthree­thati­sone

    You appear to be related to a banned Hum­mel after being asked to go away for a com­plaint of using pro­pa­ganda meth­ods.

    Please go and stay away again.

    twowith­inthree­thati­sone
    August 27, 2016 at 1:30 am
    ” Equi­lib­rium.… Solu­tions are sim­ple, con­ceiv­ing and per­ceiv­ing them is what is dif­fi­cult. Steve Hum­mel 08/26/2016”

    https://wisdomicsblog.com/2016/08/26/personal-quote-08262016/

  • twowith­inthree­thati­sone

    What pro­pa­ganda meth­ods???

    Coper­ni­cus was also banned as I recall.

  • Bhaskara II

    Bhaskara II
    Octo­ber 1, 2014 at 3:48 am 

    I have avoided read­ing “Hum­mel” for at least year or two.

    Hum­mel, please go away.

    Bhaskara II
    Octo­ber 2, 2014 at 1:46 pm

    Maybe I should have been more spe­cific and less direct.

    If you have been dis­sem­i­nat­ing pro­pa­ganda, and/or have been using pro­pa­ganda meth­ods for an extended period, please leave.

    Steve Keen
    Octo­ber 2, 2014 at 2:06 pm 

    I’ve deleted Steve Hum­mel, and I’ll con­tinue delet­ing him if he tries to come back. He’s a crash­ing bore, and from what I can tell 90% of the comments–by those other than him–are now com­plain­ing about him.

    So he’s gone.

    Bhaskara II
    Octo­ber 2, 2014 at 3:56 pm 

    Pro­fes­sor Keen,

    Thank you.

    Steve Keen
    Octo­ber 6, 2014 at 5:10 pm 

    Yes, I’m sorry … a com­bi­na­tion of my incli­na­tion to be open and too much work else­where. Any­way, he’s not com­ing back here–and if he does as an alias he’ll still be easy to spot!

    http://www.debtdeflation.com/blogs/2014/09/23/the-overdue-copernican-revolution-in-economics/

  • twowith­inthree­thati­sone

    I got banned here after repeat­edly com­pli­ment­ing Dr. Keen and agree­ing with every­thing he had re-dis­cov­ered about the dis­e­qui­li­brated state of mod­ern economies. Re-check the threads and it will con­firm that this is true. If I men­tioned that there were flows of empir­i­cal data and their eco­nomic sig­nif­i­cance he was still not con­sid­er­ing, oth­ers were annoyed about that and com­plained and Dr. Keen in his haste (I under­stand he’s a busy per­son) failed to read and con­sider all of this then it’s actu­ally just a mis­un­der­stand­ing. I think facts, intel­lec­tual curios­ity and dis­course should trump human emo­tional reac­tion as I’m sure Dr Keen does. So per­haps each of us should avoid invec­tive and accu­sa­tion. After all if there is one thing less accu­rate than neo-lib­eral eco­nomic the­ory it is long dis­tance inter­net psy­cho-analy­sis.

  • Tim Ward

    I agree with Bhaskara. And I agree with Blis­sex’ com­ment about the J.B. Clark thing. 

    Haven’t heard any­one agree­ing with the self styled Coper­ni­cus.

  • twowith­inthree­thati­sone

    Okay. Do you agree that “a mod­ern debt jubilee” and QE directly to the indi­vid­ual are poli­cies that reflect mon­e­tary grace as in gift­ing?

  • Tim Ward

    Pro­pa­ganda. Bring­ing debt and the abil­ity to pay in line isn’t gifts.

  • twowith­inthree­thati­sone

    Of course it’s not pro­pa­ganda. If the eco­nomic sys­tem itself is inher­ently cost infla­tion­ary by the cor­rect and uni­ver­sally applied cost account­ing con­ven­tion that all costs must go into price, that is the FLOW of total indi­vid­ual incomes (total mon­e­tary financ­ing) is exceeded by the FLOW of total costs includ­ing the ADDITIONAL costs of waste, obso­les­cence and depre­ci­a­tion plus the ever increas­ing growth of tan­gi­ble capital.…then the only and best ways to sta­bi­lize such a sys­tem is to COSTLESSLY increase indi­vid­ual incomes with a direct gift of income and COSTLESSLY reduce prices where no eco­nomic agent is penal­ized, namely the point of retail sale which is where every item’s total costs are ter­mi­nally summed and ended, and production.….has become con­sump­tion.

    These direct poli­cies by the way cor­rect the glar­ingly con­tra­dic­tory and uneth­i­cally dom­i­nat­ing vir­tual monop­oly on credit cre­ation that the busi­ness model of Finance enjoys (like 97+% of it) that gov­ern­men­tal stim­u­lus, which is not direct, and hence only pal­li­ates and leaves unre­solved both the sys­temic prob­lem and the uneth­i­cal finan­cial dom­i­nance.

    Note: This does not mean I’m for the non-inte­gra­tive idiocy of aus­ter­ity. I’m all for intel­li­gent gov­ern­men­tal spend­ing, but lets also solve the actual and deep­est, cur­rently largely unper­ceived, prob­lem.

    Finally, a debt jubilee IS a gift as is QE directly to the indi­vid­ual. Hence they are cor­rect, if frag­mented and incom­plete pol­icy. If one doesn’t see that.…I’m sorry, they’re just not look­ing at it. And if I’m banned for speak­ing that truth.…so be it.

  • Tim Ward

    When debt is writ­ten down in cor­po­rate bank­ruptcy pro­ceed­ings no one ever calls it gifts. Bring­ing debt in line with abil­ity to pay is not gifts. The agents get­ting debt write downs still have to pay. It isn’t get­ting out of pay­ing, it’s get­ting the debts in line with abil­ity to pay. They are not receiv­ing some­thing for noth­ing, it’s not gifts. Call­ing it gifts is pro­pa­ganda, it’s a mis­rep­re­sen­ta­tion.

  • Tim Ward

    the cor­rect and uni­ver­sally applied cost account­ing con­ven­tion that all costs must go into price, ”

    Pro­duc­ers that do not con­trol the price of pro­duced com­modi­ties can­not guar­an­tee that they will be able to recover their costs. Com­mod­ity mar­kets show this. It is in the inter­est of pro­duc­ers that they recover their costs, but they can­not guar­an­tee it. And so there is no such con­ven­tion. Busi­nesses go belly up, if they can’t cover their costs, but they can­not guar­an­tee they will be able to cover them.

  • twowith­inthree­thati­sone

    Both of your exam­ples are anecdotal/micro-economic obser­va­tions. I’m talk­ing about macro-eco­nomic real­i­ties and basic account­ing rules/conventions. No one is talk­ing about guar­an­tee­ing a busi­ness be able to cover its costs. I am talk­ing about mak­ing com­mer­cial sur­vival some­what less dif­fi­cult and onerous.…especially for new busi­ness start ups, and why not? Enforced aus­ter­ity is irra­tionally author­i­tar­ian and puni­tive, and only ben­e­fits Finance who inher­its assets, and encour­ages cor­po­rate giantism and oli­garchy.

    I also never said the bank­ruptcy process was gift­ing. A debt jubilee where indi­vid­u­als are GIVEN money, even with the pro­viso that they pay down debt with it…is mon­e­tary grace as in Gift­ing. A fully fleshed out philo­soph­i­cal and lin­guis­tic con­cept of grace would be a con­scious­ness rais­ing expe­ri­ence for every­one, espe­cially econ­o­mists, and it IS the basic con­cept upon which a new and mod­ern eco­nomic phi­los­o­phy needs to be built which Dr. Keen him­self has called for.

  • Tim Ward

    Buy now and receive absolutely free, your free gift!” Chil­dren know bet­ter. If you have to pay, it’s not a gift.

    Among the ‘numer­ous addi­tional costs’ desta­bi­liz­ing the econ­omy, you keep insist­ing must be in price, are monop­oly charges, rent extrac­tion, eval­u­a­tion fraud, spu­ri­ous fees, tolls, charges, penal­ties, that have no coun­ter­part in the nec­es­sary costs of pro­duc­tion, trans­port, dis­tri­b­u­tion.. Cut­ting these down by jubilee or QE is not a gift. As if return­ing the pro­ceeds of fraud back to the vic­tims is a gift. Of course it’s pro­pa­ganda to say that debt jubilee is a gift.

    The monop­oly fees, eval­u­a­tion fraud, rent extrac­tion, spu­ri­ous fees tolls charges penal­ties, etc are why your macro thingy is full of holes. They aren’t nec­es­sary costs that have to be in price. Cut­ting these down is not a gift.

  • Tim Ward

    For your asser­tion that what I’ve said about com­mod­ity prices and inabil­ity to cover costs when prices drop, this is nei­ther sim­ply anec­do­tal, nor micro. The data I quoted was from the finan­cial press, con­cern­ing record low recov­ery rates for energy bonds, high default rates, sim­i­larly for min­ers and agri­cul­tural pro­duc­ers. The data comes from finan­cial report­ing agen­cies, credit report­ing agen­cies, the Fed etc, and it’s in the finan­cial press such as FT, Bloomberg etc. Also, it has macro effects for those com­mod­ity pro­duc­tion coun­tries, whose prin­ci­pal income is from com­mod­ity pro­duc­tion. This pric­ing pres­sure can become so severe that they can no longer sup­port their prior cost struc­ture. The Saudis have been cut­ting wages, 20% cuts I’ve seen, you can see the arti­cles in Bloomberg, NYtimes, etc if you search. This is hap­pen­ing right now. Other such com­mod­ity pro­duc­ing states have sim­i­lar bud­getary con­straints. Macro real­ity.

  • twowith­inthree­thati­sone

    I’m sorry, but you’re not fol­low­ing me here so far as the dif­fer­ence between micro-eco­nomic data (your exam­ples) and macro-eco­nomic, i.e. sys­temic fac­tors. And many of your exam­ples are either irrel­e­vant or actu­ally make my point. For instance “monop­oly fees, eval­u­a­tion fraud, rent extrac­tion, spu­ri­ous fees tolls charges penal­ties, etc” are sim­ply costs. They there­fore are included as a sub­set of total costs. Total costs as a flow is a macro-eco­nomic fac­tor. The indi­vid­ual costs you refer to are micro-eco­nomic fac­tors because they are not con­tin­ual or built into the sys­tem. Dr. Keen cor­rectly states that inter­est (a sin­gle addi­tional and con­tin­ual cost fac­tor) can be paid over time.…except it requires con­tin­ual bor­row­ing and hence the build up of debt. But Inter­est is not the only addi­tional flow of built in sys­temic costs. All of the other sys­tem­i­cally built in flows of addi­tional costs (waste, obso­les­cence, depre­ci­a­tion, the costs asso­ci­ated with re-invest­ment of sav­ings-profit) make the sys­tem cost infla­tion­ary and hence unstable.…without mon­e­tary and/or price Gift­ing. Min­sky and Dr. Keen are cor­rect that the fun­da­men­tal direc­tion of cap­i­tal­ism is up, and the deep­est rea­son for this is the cost infla­tion­ary NATURE of profit mak­ing sys­tems. How­ever, why should we be hung up on capitalism.…when the profit mak­ing sys­tem of Mon­e­tary Distributism/Gracenomics/Wisdomics/Social Credit elim­i­nates that ten­dency? And of course cost­less Gift­ing, Mon­e­tary Distributism/Gracenomics/Wisdomics/Social Credit makes the sys­tem actu­ally work for the indi­vid­ual and for all busi­ness models…not just Finance. A nice “lit­tle” addi­tional and eth­i­cal ben­e­fit.

  • Tim Ward

    You don’t seem to real­ize the enor­mity of your task, you’re in an impos­si­ble posi­tion. You are try­ing to sell some­thing, and I’m not. You’re fail­ing to prove any of your points.

    You have to prove your asser­tion con­cern­ing an account­ing con­ven­tion that is never not in effect, that all cost must go into price. Not only is it demon­stra­bly false micro and macro for price tak­ing com­mod­ity pro­duc­ers, when com­mod­ity prices fall, it is also false for mixed economies, and price mak­ers, and macro, when sales crash in reces­sions, depres­sions, severe defla­tions and the like. When you can’t sell, you can’t force costs on any­one. That is econ­omy wide, in severe depres­sions, macro.

    Also, you have to prove, not sim­ply assert, that the numer­ous addi­tional costs you keep refer­ring to and insist must be in price, don’t include monop­oly charges, rent extrac­tion, val­u­a­tion fraud, spu­ri­ous charges of all kinds. If you can’t prove this, then you can’t sell your pro­pa­ganda. That is, your claim con­cern­ing gifts is false. You have to detail all the addi­tional costs you refer to, to show explic­itly that they are nec­es­sary costs, bring out the num­bers. But you never detail them as has been the case in the past. 

    So give a ref­er­ence for your asser­tion con­cern­ing the account­ing con­ven­tion, to a rec­og­nized source, text­book, FASB, GAAP or some­thing. Since we know prices can’t be forced on mar­kets by price tak­ers, there is no such con­ven­tion.

    You can’t sell your pro­pa­ganda if you can’t do those things.

    The more rope you pay out, the more peo­ple can see your pro­pa­ganda.

    Quot­ing you, “For instance “monop­oly fees, eval­u­a­tion fraud, rent extrac­tion, spu­ri­ous fees tolls charges penal­ties, etc” are sim­ply costs. They there­fore are included as a sub­set of total costs.” Now you are really sunk, because you are mak­ing claims con­cern­ing unnec­es­sary costs. They are not sim­ply costs, they are price infla­tion­ary, preda­tory, and in cases fraud­u­lent, crim­i­nal. And so you’re back to the case of giv­ing back (jubilee or QE) to the vic­tims of fraud, pre­da­tion, exploita­tion etc, the pro­ceeds of same, and claim­ing it’s a gift. Out­ra­geous.

    Remem­ber, I’m not sell­ing any­thing, you are, and the more rope you pay out, the more peo­ple can see you are a rank pro­pa­gan­dist.

    For instance “monop­oly fees, eval­u­a­tion fraud, rent extrac­tion, spu­ri­ous fees tolls charges penal­ties, etc” are sim­ply costs. They there­fore are included as a sub­set of total costs.” —you hung your­self with that one. Imag­ine what peo­ple will think, you’re say­ing all costs must be in price, and you’re say­ing those things above (monop­oly fees, eval­u­a­tion fraud, rent extrac­tion, spu­ri­ous fees tolls charges penal­ties, etc) are sim­ply costs, and they must be in price. Hor­ren­dous pro­pa­ganda. Who is going to buy that? You’re try­ing to sell some­thing, I’m not.

  • twowith­inthree­thati­sone

    You are try­ing to sell some­thing, and I’m not.”

    Incor­rect. You’re sell­ing a cur­rent ortho­doxy. I’m sell­ing look­ing at an acknowl­edged account­ing con­ven­tion and an unsta­ble eco­nomic history.…because the­o­rists have not rec­og­nized the flaw in it and cor­rected the insta­bil­ity it causes with valid and work­able eco­nomic polices like a uni­ver­sal div­i­dend and a rebated back to mer­chants dis­count to con­sumers at point of retail sale.

    Isn’t call­ing some­one a pro­pa­gan­dist ad hominem? Espe­cially some­one who is espous­ing a mere eco­nomic ortho­doxy of “only this for that” when Dr. Keen’s call for “a mod­ern debt jubilee” seems to be more aligned with my per­spec­tive of a new phi­los­o­phy and poli­cies of mon­e­tary grace as in gift­ing.

  • twowith­inthree­thati­sone

    Human­is­tic psy­chol­o­gists and sages down through his­tory were cor­rect when they rec­og­nized that it is hard to per­ceive and make fully real a new idea/paradigm unless and until one actu­ally lets it into their mind where that process actu­ally begins.

  • Tim Ward

    You can’t win. And I don’t need to. All I have to do is get peo­ple to ask ques­tions. Ask for ref­er­ences for your unsup­ported asser­tions. It’s not sell­ing any­thing to get peo­ple to ask ques­tions about you’re unsup­ported asser­tions.

    As soon as peo­ple ask ques­tions, and ask for ref­er­ences, your pro­pa­ganda falls apart. For exam­ple, the unsup­ported asser­tion that obso­les­cence, and depre­ci­a­tion are prob­lems. If peo­ple ask them­selves, such as, ‘is it pos­si­ble that in a high pro­duc­tiv­ity econ­omy, with large excess capac­ity, mod­est capac­ity uti­liza­tion, and con­tin­ual build of more, new cap­i­tal each busi­ness cycle, there is a prob­lem with obso­les­cence and depre­ci­a­tion?’ Obvi­ously not. But you could pro­vide a ref­er­ence, and prove this wrong. But you won’t. Arti­cle after arti­cle comes out in the press about over­ca­pac­ity. China put in place more con­crete (+rebar) in 2011, ’12, and ’13, than the US in the entire 20th cen­tury. US increased tar­iff over 240% on Chi­nese steel. There is no prob­lem with obso­les­cence or depre­ci­a­tion in those kinds of pri­mary indus­tries. This also applies to higher tech­nol­ogy pro­duc­tion. Prod­uct after prod­uct you look at, no short­age of sup­ply. That means there is no prob­lem in pro­duc­tion with obso­les­cence, or depre­ci­a­tion, or else how could there be such over­sup­ply and excess capac­ity in all man­ner of pro­duc­tion and man­u­fac­tur­ing indus­tries and the prod­ucts of same? 

    You’re mak­ing unsup­ported asser­tions that you can’t prove, and you can’t pro­vide any ref­er­ences for.

    Direct quotes from twowith­inthree­thati­sone “I’m sell­ing look­ing at an acknowl­edged account­ing con­ven­tion and an unsta­ble eco­nomic his­tory…” refer­ring to: “the cor­rect and uni­ver­sally applied cost account­ing con­ven­tion that all costs must go into price, ”

    Who acknowl­edges your cost account­ing con­ven­tion? Pro­vide some ref­er­ences, to rec­og­nized sources, ref­er­eed jour­nals, text­books, or some­thing. But you won’t. Because you can’t. You should never have started, because peo­ple will ask for ref­er­ences, and obvi­ously not self ref­er­en­tial ones. With­out ref­er­ences, you can’t win. Prove me wrong. Put up some ref­er­ences.

  • Tim Ward

    twowith­inthree­thati­sone does not have a “real a new idea/paradigm” because none of his asser­tions are true. They can­not be demon­strated to be true, no data is ever sup­plied. Every one of them falls apart on inspec­tion. There are no ref­er­ences for them, no sup­port­ing data, and twowith­inthree­thati­sone won’t pro­vide any ref­er­ences.