While reading Salerno's recent post on Gunnar Tómasson I was somewhat confounded by Tómasson's following statement:
"Interest on loans used to finance production is paid out of the sales proceeds of the corresponding output. If the sales proceeds derive solely from the employment income generated by the production itself, then there can be no surplus. An employer breaks even if the cost of his production inputs is 100 krónur and he sells his output to those who sold him inputs for 100 krónur. Sales proceeds in excess of the production cost must be financed with money creation, new money must be created in the economy. Interest paid by the production sector does not reward any contribution of money to wealth creation. It must derive from money newly created in the banking system, which means that it must be loan-financed. Someone must become indebted to the banking system for it to be possible to sell for 110 krónur goods whose production cost only 100 krónur."
There have been posts about this else where, put the topic still confuses me every time. If there's a set amount of money in an economy, where does money interest come from? I think the Tomasson is saying it can only come from money creation (correct me if I'm wrong).
Now I know that looking at it from a static point of view can be misleading, but does anyone have any good explanations for the existence of money interest in thecase of a stable money supply?
Last, why is this not ever explained by Mises, Rothbard, Hayek, etc.? Have I missed it? It seems to be such a simple and fundamental thing that you think it would be explained.
If anyone knows where this is looked at extensively, I'd appreciate it.
If you loan me 10 euros I use that to buy equipment. I earn 20 euros, repay you 15, and keep 5.
However could the Iceland economy go totally bankrupt with economists like that???
It's not fascism when the government does it.
“We must spend now as an investment for the future.” - President Obama
Remember that money is only a means to conduct indirect exchange. If for example you loan me ten loaves of bread and I use that to build a new baking oven and make twenty loaves of bread I can pay you back 12 loaves and keep 8. Interest in this case is just higher productivity.
If we introduce a static money supply then you lend me money and I buy capital goods with that money, then produce goods that I sell on the market for money and pay you back in money. Because we increased the total supply of goods the prices for other goods have fallen and we have earned a surplus to pay interest out of.
The fallacies of intellectual communism, a compilation - On the nature of power
Tomasson's fallacy here derives from his misunderstanding of how profit and loss is calculated. Together with Marx and most economists, he believes that profit is M -> M', with profit being M' - M. Profit in double entry accounting is not the operational surplus accruing into a firm's cash account, as Tomasson believes, but the operational accrual of assets over liabilities. Cash is only one item in a firm's schedule of assets. With disbursements in the amount of 100 kronur, and sales in the amount of 100 kronur, it is possible for there to be a positive rate of profit, because in double entry accounting not all disbursements are expensed. For example, dividends are never expensed. And many disbursements are expensed only after a delay, such as for the purchase of depreciable assets, in which case today's disbursements are expensed against tomorrow's prospectively greater sales. The theorem of accounting is illustrated athttp://geocities.com/socredus/compendium/accounting_profit.gifYou do raise an interesting question regarding a stable money supply. The way double entry accounting works, a stable money supply can only support a stable economy. But a growing economy is not stable but growing. So it requires an expanding money supply that is expanding with expanding trade and commerce.You are right that it hasn't been explained by Mises, Rothbard, Hayek, etc. They, perhaps more so than most economists, explain things philosophically, without reference to the practical reality of how profit and loss is actually calculated.Brock Moore[email protected]
What does it even mean to say they explain things "philosophically"? I hope you do not mean this in some pejorative sense...
Freedom of markets is positively correlated with the degree of evolution in any society...
I mean that they refer to profit and loss without reference to how profit and loss is actually calculated. That means that they have only an ephemeral relationship to real economics.Brock Moore[email protected]
I mean that they refer to profit and loss without reference to how profit and loss is actually calculated. That means that they have only an ephemeral relationship to real economics.
By identifying what is necessary in the concept of profit they have an "ephemeral" relationship to "real economics"? How does that work exactly? If anything, it's the reverse. You must be referring to the kind of accounting measures Reisman often engages in constructing.
The like "ephemeral" relationship exists between dimensionless concepts such as point, line, and circle and their "real-world" counterparts.
How's that "ephemeral"? The word means fleeting, passing...
If the relationship between an analytical concept of profit and real-world accounting practice is "ephemeral" (whatever the writer may mean thereby), the relationship between the concepts of point, line, and circle and their "real-world" counterparts would similarly be "ephemeral".
In both cases, analytical apples are mistaken for real-world oranges, so to speak.
Mises takes profits to be any excess of gains over costs (both appraised subjectively), and particularly an entrepreneurial phenomenon arising from uncertainty. It's abstract and general (hence an economic concept), and there really isn't anything to confuse.
In 1922, Keynes placed on record the following definition of economics: “The Theory of Economics does not furnish a body of settled conclusions immediately applicable to a policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” As "technique of thinking", economics is properly labeled a "branch of logic" (Schumpeter) or "an ideal system of thought" (von Mises), with respect to which von Mises made the following statement: "Logic and mathematics deal with an ideal system of thought. The relations and implications of their system are coexistent and interdependent. We may say as well that they are synchronous or that they are out of time. A perfect mind could grasp them all in one thought. Man's inability to accomplish this makes thinking itself an action, proceeding step by step from the less satisfactory state of insufficient cognition to the more satisfactory state of better insight. But the temporal order in which knowledge is acquired must not be confused with the logical simultaneity of all parts of an aprioristic deductive system. Within such a system the notions of anteriority and consequence are metaphorical only. They do not refer to the system, but to our action in grasping it. The system itself implies neither the category of time nor that of causality. There is functional correspondence between elements, but there is neither cause nor effect." ('Human Action: A Treatise on Economics, 1949, Part I, Ch. V, Section 1, The Foundation for Economics Education, 1998.)
In 1922, Keynes placed on record the following definition of economics:
“The Theory of Economics does not furnish a body of settled conclusions immediately applicable to a policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.”
As "technique of thinking", economics is properly labeled a "branch of logic" (Schumpeter) or "an ideal system of thought" (von Mises), with respect to which von Mises made the following statement:
"Logic and mathematics deal with an ideal system of thought. The relations and implications of their system are coexistent and interdependent. We may say as well that they are synchronous or that they are out of time. A perfect mind could grasp them all in one thought. Man's inability to accomplish this makes thinking itself an action, proceeding step by step from the less satisfactory state of insufficient cognition to the more satisfactory state of better insight. But the temporal order in which knowledge is acquired must not be confused with the logical simultaneity of all parts of an aprioristic deductive system. Within such a system the notions of anteriority and consequence are metaphorical only. They do not refer to the system, but to our action in grasping it. The system itself implies neither the category of time nor that of causality. There is functional correspondence between elements, but there is neither cause nor effect." ('Human Action: A Treatise on Economics, 1949, Part I, Ch. V, Section 1, The Foundation for Economics Education, 1998.)
"Supply creates its own demand" summarizes Jean Baptiste Say's attempt to communicate the like view of the functional correspondence between Suppliers of Factor Inputs to the Production Process, on the one hand, and Entrepreneurs, on the other hand, with the latter envisaged as giving in exchange IOUs/Money/Claims on the Final Output equivalent of Factor Inputs Supplied.
This functional correspondence is the essence of the Production Process in Entrepreneurial Market Economies, with Entrepreneurial Profit being no part thereof.
This analytical conclusion is as Apples to "profit" Oranges taken from the tool kit of real-world business accountants.