[From Bill Powers (2003.12.08.0506 MST)]
Bjorn Simonsen (2003.12.07.2 1:35 EuST)–
I will
work with your Test Bed. Defining your Household, shouldn’t there
also be a variable for tax and fees. If you have a variable for tax and
fees, you also need an public Plant. This public Plant (the State) may
then have a “reserve” Rpubl =Rpubl + (T*( W* H* N) -Gpubl*
-WHN - Spubl) W is the sum of all daily rates in dollar per day
H is the sum of all rates of working in number of days per day N is the
sum of all rates of worker-days worked per day Gpubl is goods distributed
per day in millions per day, purchased goods is negative. Spubl is public
savings and funds etc.
The point of the Test Bed is to include all major transactions without
introducing so much detail that the computations become incomprehensible.
I agree that a Public plant (government and other not-for-profit
entities) needs to be included eventually, to levy and receive (and
redistribute) taxes and fees, and also to borrow and redistribute money,
as well as creating new money. The single consumer of the present model
needs to be expanded into multiple consumers with a range of reference
levels for savings and goods-consumption. And the single plant needs to
be expanded into multiple plants to allow room for making various
goods/services at various prices, following different policies with
respect to depreciation, profit distribution, and so on. I have to say
“and so on” because I simply don’t know what all the properties
of this economic environment should be.
So I welcome help in developing this Test Bed, but caution that we really
do need considerable advice from people with practical experience in the
world of business (like you, perhaps?), so we can make the model
realistic enough to mean something. My idea of how to proceed is to
define large chunks first, like Consumer and Producer, Government and
Bank, and then break them down into smaller chunks as we see the need for
more detail.
For various reasons I have returned to Keynes’ General theory of
employment, interest, and money, to look again at Chapter 6,
“The definition of income, saving, and investment.” These are
clearly things we will want to include in the model, but reading Keynes
makes it clear that we don’t want to do it the way he did it. It’s not so
much that there is a disagreement with Keynes, it’s that his definitions
are so arbitrary and circular that it’s nearly impossible to figure out
what he thinks he’s talking about.
At the beginning of this chapter, Keynes tries to set a foundation for
reasoning about income and savings. But he immediately gets into a kind
of argument we must avoid as much as possible. In trying to figure out
how much income there is, he properly subtracts costs from gross
proceeds, the costs including such things as repair and expansion of
machinery and “factor costs” of production. But then he starts
to second-guess himself. Suppose the entrepreneur had decided not to use
the machinery to produce the goods, but to leave it idle, maintaining it
at some lower level to preserve its value. He would have had less income
from production, but he would have had less expense, too. So Keynes wants
to say that this lessening of expense that could have been obtained by
not using the machinery, less the actual costs of using the machinery, is
a “user cost” and should be subtracted from gross income to
determine net income. Unfortunately, he treats this user cost as part of
a real transaction, to the point where he says that everyone else’s
income from the entrepreneur, which is equal to the entrepreneur’s total
expenses, includes this imaginary user cost. In fact, of course, the
depreciation costs which might have been, but were not, avoided are
not subtracted from the payments handed over to consumers and
other entrepreneurs; actual payments are unaffected by such calculations
that take place in the entrepreneur’s mind. I should think that
government tax agencies would be quite unsympathetic toward claiming a
deduction for the “sacrifice” of savings from courses of action
not taken.
This is the chapter where Keynes defines savings and investment in such a
way that they are both equal to A - U (gross income minus user costs),
and thus “proves” that savings equal investment. We will not
try to get away with such tricks. Invested money is spent on investments,
Saved money is what is left in the reserve, unspent (and perhaps
accumulating interest). We don’t even need to use the words saving and
investment; those are abstractions from what actually happens. The Test
Bed is a model of what actually happens.
The point of the Test Bed becomes clearer: it is to prevent verbal
flim-flam and complexity from concealing what actually happens in
economic transactions. Or simply to keep us from confusing ourselves by
trying to take short-cuts through abstractions.
Consider the question of the “value” of a company’s assets. In
Keynes’ world, value is partly what one imagines could be obtained by
selling something at the market price, Thus to compute income over some
accounting period, it is necessary to compute the value of unfinished
goods, machinery, and finished but unsold goods at the beginning and the
end of the period, as well as counting the actual cash obtained from
sales. Thus the value is made partly of imaginary money, money that has
not actually been obtained to prove that one’s estimate of value (of
machinery, say) was accurate. The actual value of something is the price
you sell it for, as most hard-headed entrepreneurs would probably agree.
In our model we don’t need to be concerned with imaginary quantities. A
machine costs money to buy and maintain, and it establishes a certain
degree of productivity for converting worker-hours into goods and
services. It has no other value unless it is sold, and then its value is
whatever amount of money comes into the cash reserve as a result of the
sale. Of course if we like we could introduce a value calculation for
purposes of taxing property, or to serve as collateral for a loan, but
that is an entirely different matter: that’s part of the psychology of
the people who are going to operate in this environment. The only actual
transactions that would occur would be the paying of the taxes or the
obtaining of a loan. In this model we need be concerned only with real
transactions, real transfers of goods and money. The psychological
postulates can be left for the time when we try out models of the
controllers of this environment
We’re sure to leave things out of this model; let’s just make sure they
are small things which would have little influence on the behavior of the
whole system.
Best,
Bill P.