Regarding your intro: it reminds me of Robert Anton Wilson's Constructive Gullibility. To fully understand an idea, one must temporarily believe it. Critical thinking should happen after initial understanding.
RAW also proposed, through a character in his Schrodinger's Cat trilogy, that each factory worker should own a robot, have it work in his place, and collect the same hourly wage -- about four times his old income, since the robot could work nearly all the time.
I have developed this into a more elaborate economic proposal for organizing self-reproducing production systems with an internal machine-time-backed currency for an internal economy of small entities trading time on each others' machines through an automated market, allowing everyone access to vastly more real capital, and the ability to each make complete new production machines (and new types of machinery) as well as most other goods. I have called it the Wide Ownership Workshop Industrial Ecology, or WOWIE, but the acronym is a bit embarassingly cute, I admit
I hadn't heard of the Derek Flint movies, '60s James Coburn playing a supergenius James Bond, working for ZOWIE, he sounds even better than RAW's Fission Chips (agent 00005) fighting BUGGER (Blohard's unreformed goons, gangsters and espionage renegades)
The macroeconomic story of industrial capitalism has always been and can only be the story of surplus supply chasing insufficient demand (purchasing power).
Which is why the story is actually one of consumer credit bubbles inflating then bursting.
Without some combination of exports and financial usury amounting to loan sharking, there aren't enough buyers to be found.
But eventually the service on consumer debts is too much and goods stop moving.
Your post about C. H. Douglas last week was the first I'd heard about Social Credit in a while.
The first I read about it was six or seven years ago, but back then I'd only seen its criticisms of central banking and fiat money. Basically, the idea was that, if a nation's money supply depends on money being lent into existence by the central bank, such that the amount of money owed to the bank (at interest) is always greater than the amount of currency in existence, then the average person will always be in debt (not to the central bank itself, but to intermediaries along the chain). Thus, the total amount of debt always grows, and no matter how frugal individual citizens may be the best that they can do is beat each other in the rat race while the banks continue to exploit the average worker. Meanwhile high high inflation becomes necessary to keep the system from collapsing entirely.
It seemed like a very reasonable way to explain what's going on in a country that's had central banking since 1913 and de facto fiat money since 1933. And it's influenced a lot of my own economic thinking since then; I even have an article at my own Substack explaining why William Jennings Bryan is one of my favorite statesmen. (Basically, if he had won the presidency in 1896 or 1900 and implemented free silver, that might have halted the series of deflationary crunches that ended up making the Federal Reserve necessary, and I also really admire his anti-imperialism).
That said, this A < A + B theorem seems, at least on my first reading, rather simplistic. Since I study physics and biology for a living, I'm used to looking at simple mathematical models of complicated systems and having to make a judgment about whether they make sense, and the ones you cited here don't, at least to me. In reality a commercial enterprise is going to have a lot of negative cashflows that can't be easily divided into A and B - wages, profits and dividends, material costs, taxes, rents, interest on loans, money saved and/or invested against eventual depreciation, etc. And pretty-much all of that money is going to end up in the hands of some consumer or another at some later point - for instance, a company might deal with depreciation by taking out a loan to build a new factory, and then pay back the loan with interest, so that some of that money ends up in the pockets of the construction workers, some of it pays for materials, some of it pays the bank's employees, some of goes to the bank's investors and stockholders, and so forth.
So I think the only way you get a whole bunch of money disappearing with every cycle, and leaving consumers with less and less of a share in the economy, is if there are pieces missing from your model. Which there always will be. After all a model of the economy, or an ecosystem, or sometimes even a single living cell will never capture all the details - the real test is whether or not its failures are big enough to produce a physically implausible result. (see "attofox problem" for a humorous example.)
This isn't to say that the economy never gets worse over time for ordinary workers. I actually think in the United States it's been doing that since the 1970s, which I attribute to (1) global dollar dominance making domestic manufacturing uncompetitive vs-a-vis imports and (2) a steadily increasing regulatory burden which makes a lot of productive labor, especially building infrastructure like railroads and power plants, impossible. And I agree with your thesis from a month ago in "Gross Domestic Fraud" about how official GDP numbers are gimmicked to cover this up.
B -> Costs of Raw materials, machinery, plant maintenance, and loan interest.
Douglas noted that A < A + B.
Lemma: Per what you have noted in your previous writings Pater @Tree of Woe , The following holds true, given the primacy of the Petrodollar:
A + B < A + X, where X -> Additional Purchasing Power garnered from Exorbitant Privilege.
Using the Squeeze Theorem, however:
A ~=< A + B ~=< A + X
A ~=< A + X
Which gets us to...
0 ~=< X
X tending towards '0' ... in other words you can use Douglas' arguments to mathematically 'prove' that for any nation with A < A + B, A + B < A + X, X tends to '0' ... QED 😉
tl;dr: If the A + B Theorem is correct, then for any A + B < A + X, All such 'X' will eventually tend to '0; making The DOOM Cometh a Mathematical certainty 😍
The robots work in the factories, the robots stock the shelves, the robots take the majority of the products, unsold and put them in the trash. The robot trashmen take the trash away.
A few human survivors raid the trash-heaps, searching for intact goods, avoiding the robot guards.
Mercifully, before we have such a future, lack of talent will in all likelihood prevent AI dystopia.
Supply and Demand once more raises it's head.
Not speaking of the theorem itself, others will do better on that front, instead an observation on supply and demand that always comes to mind when the words are mentioned. Like a magic spell, a vision in the supermarket.
Several shelves of what can be termed 'hypervegan' food, fake burgers from heavily processed extracted pea-protein and the like.
The volume of goods in comparison to the minority of a minority who eats them...
Not just in this, but masses of supply flying from factory to shelf to landfill.
The international industrial must be terrifying in the concrete numbers of utter waste on edibles and inedibles that never make sale.
Even if you give unlimited funds to the consumer, surely supply will still be nightmarishly beyond demand?
Even the obese have a limit on how much soda they can drink and how many plastic toy models they'll buy.
If the AI 'utopia' transhumanists, futurists and technocrats desire truly came to be, you wouldn't need a coffin, mankind would be buried under a flood of supply.
As if UBI would fix such a dire structural issue, it's basically sticking fingers in ears and singing la la la!
Yes, AI will replace certain types of jobs, maybe lots of them, but given what happened during the industrial revolution, I don't think AI can exceed that upheaval. In about 200 years we went from 90%+ of the population working in agriculture to about 3%. The jobs of most craftsmen producing our material goods completely disappeared. And yet today we have an even larger population, we are not starving or impoverished, and we posess material goods that our ancestors couldn't even imagine. So what happened? The new technology created new jobs. That seems to be how every major technology works, from the development of agriculture to microchips. Why should AI be different?
Next, as you point out we live in an age of oversupply. One would think that this practice would ultimately lead to bankruptcy, but so far it hasn't. What is funding this discarded oversupply? There are a number of possibilities I could think of: 1) Finance. Money is borrowed (and simultaneously created) to fund ongoing operations. We may not be financing today's oversupply with today's revenues, but with promises of repayment from future revenues. 2) Subsidies. The modern system of taxes and tax deductions may make this waste less expensive than it should be. 3) Higher prices: The market for goods today is hyper-competitive. For large companies, marketing is a major expense, often more than materials or production. Producers fight for shelf space or eyeballs, so they need to give the appearance of large demand. Whatever doesn't sell is considered an expense that is factored into pricing.
Let us know when he gets to the ideas of financial capital and it's cut of the revenues. As technology progresses, our industries become less labor intensive more capital intensive. Since it's unrealistic (and less profitable) today to save funds for things like "building a new factory" everything is financed. Thus, an ever increasing amount of revenue goes to capital, or more specifically, the owners of capital. Right now this is the big problem that economists are trying to tackle. The biggest driver of this is our current debt-based (not fiat, that's a misconseption) money system, where an unlimited supply of debt is available to those with sufficient credit.
Interesting to hear you ran your ideas through a "toy economy". I started that years ago and eventually created a computer generated "Sim Economy" with dozens of companies and hundreds of individuals. I would change some of the parameters like injecting capital, or bank failures, or increasing productivity in certain industries to studybthe result. It started small but grew over the years. Very enlightening. However, you can't create a test economy from the ground up. You need to set up your initial conditions and then let it iterate.
I'm in full agreement with you on the problem of financial capitalism. I've alluded to it in my writings on the petrodollar.
It's very impressive that you created Sim Economy -- did you learn much from it? Any particular findings that were surprising, or that justified or rejected beliefs you'd had?
Thanks, it was more like a part-time hobby that went on for years. I did it for the same reason you did, to better understand economic theories concerning money flow. I could fill several blogs talking about it, so I'll try to just stick to the highlights.
The first Sim 1.0 was much like yours, except that it was larger, and I added "banks" as pure financial intermediaries (no money creation function) to the system. Interest paid was always less that interest charged, with the difference going to bank wages. Money for maintenance/upgrades was borrowed, and a portion of profits after expenses and debt payments put into the bank. This type of model works well for understanding how money flows in a closed system. I found that Von Mises' circular money flow always holds. However, it's a static model, so it's of limited utility. You can't make changes outside of the initial conditions. For example, changing the price of a good or service.
In the next iteration Sim 2.0, I wanted to see dynamic money flow changes. This required creating a table of Supply/Demand functions for each entity (I limited it to 3: Flat, steep, and a Median, all linear.) Doing this I could inject money into the system at different points and times. When new money was put into the system, I could observe the ripples of inflation traveling through the system, until the system stabilized at new equilibrium price points. This was analogous to dumping a large bucket of water into a half- filled bathtub - large disturbances at first, but eventually it settles at a new level. I could also introduce new entities into the system and increase production. I found that the model agreed with 1) inflation (not price increases) only happens when you add money to the system, i.e. Friedman. 2) Inflation moves through the economy at a rate based on the frequency and size of the transactions. Those closest to the source benefit the most because of 3) Assuming a significant portion of extra profits are put in the bank, after stabilization nothing changed except the distribution of asset ownership in the bank. In other words, it only resulted in a transfer of assets (wealth). In another scenario I had the bank president stealing a portion of the bank holdings and spending them. Same outcome - money was just redistributed. 4) Financing allows you to create new supply without any underlying demand, economic demand being "I have money and am ready to buy it", not "I want it". This actually creates demand as per Say's Law. For example, I would assume 10 additional individuals enter the workforce (children becoming adults). They begin as unemployed but start a new business by borrowing from the bank. The system shifts slightly but remains stable because of the wages and spending of the new workers. This can continue until the bank runs short on funds, which creates a high demand for money and overall deflation. There is a limit to growth without new money or money equivalent being added to the system.
In iteration Sim 3.0, I wanted to measure money velocity and its changes per the Fischer Equation and introduce fractional reserve banking. I could find no information on real world ways to manipulate or control money velocity, and I concluded that it's just money that is not being used, but just sitting somewhere. I found that when money is injected into the bank, or parked in the bank, the money velocity decreases. When that money is loaned out or withdrawn and spent, the money velocity increases. Insisting that increasing M into the system and parking it in reserves causes V to decline, not the other way around, got me into arguments with many economists, who could never explain the contradictions. I concluded that most Fed and academic economists are institutional morons. Finally, I tried to implement fractional reserve banking, but I could never get the simulation to stabilize. It always blew up either with hyperinflation or a unsustainable debt. This is of course not proof that it cannot be done, but I haven't figured out the assumptions that need to be made in order for it to work.
I've concluded that mathematical economics is really only good for describing money flows. It cannot anymore model growth in an economy than mathematics can model growth in a biological organism, because it can't factor in human nature, which has led to the development of behavioral economics. Ideological "economists" and the politicians they advise reflect this. All of the most respected of them talk in terms of money flows - interest rates, GDP, reserve ratios, money velocity, etc. They don't have any understanding of incentives or know how to achieve economic growth. Because they can't model it, to them, economic growth is something that "just happens". Kamala's economic advisors can't even give her a plausible sounding plan to get inflation under control.
Is the A+B theorem valid? As modelled, using a certain set of assumptions, maybe not completely. But it certainly has reasonable predictive validity. We are in a time of massive production and massive debt. The theorem accounts for these facts pretty well. So do other theories I guess; I'm no expert.
Anyway, to me A+B is most interesting for its practical implications. There are two ways of making up for missing demand: lending fiat money on a fractional reserve basis at interest, immiserating individuals and nations as interest compounds and eventually becomes unrepayable; or...another way.
Social creditors in Canada and New Zealand--and even early Quebec, a couple of hundred years before Douglas--regarded money merely as a medium of exchange for goods and services, not as a legitimate source of profit. The idea, then, was to introduce only as much currency (in Quebec it was playing cards cut into pieces!) as the system could circulate at any one time, and to lend it at very low or no interest. This would correct the demand imbalance while stimulating new enterprise, without introducing unrepayable debt. The Canadian and New Zealand experiments were foiled before they could really get going.
A certain mid-20th century person from a certain Central European country did much the same thing, to great effect. But he didn’t do so well in certain other spheres of activity and anyway he was evil so enough no more about all that sorry for mentioning it
A spinning wheel increases the supply of thread, but puts hand-spinners out of work, leaving fewer able to buy the cheaper thread. But you can't give the thread away for too cheap, because then there'd be no money to repair the wheel. So we give the impoverished people credit, which the wheel owner concentrates as wealth. The usury is the financial distortion that accompanies the machine's labour distortion. (And then it's off to the races and cycles of penury.) That's the gist of it?
Jaques Ellul once said the distinction between modern and ancient industry is that we consider the 'best tool' to be 'what's best for producing the object' while they considered 'what's best for edifying the subject.'
The impetus for industrial production seems to have stemmed from a desire to prove one's worth - free of class or family or other Subjective distinctions. Making superior objects provided Objective Truth of one's superiority. It led to a mania for standardized measurements and competition along those measures. Precision and efficiency became fetishized - since they're demonstrable, inarguable, and win wars. To this day, we use technological competence as our benchmark.
All this to say: the whole A+B price problem is irreconcilable. As you astutely observed, we did this with slaves before we did it with machines. The equation of civilization is balanced by sacrifice: theft, usury, and conquest, etc., or by self-sacrifice: charity, jubilee, colonization etc. Either way, someone has to simply eat the cost to result in a net-producer instead of net-consumer society.
So far the commenters on Douglas Social Credit can be divided into two groups -- the first group which knows he's obviously right, and the second group that knows he's obviously wrong!
Next essay I'm picking a more agreeable topic, maybe Trump or something.
I'm going to have to work through these simple economies several times in order to get a full handle on this problem.
But being a Level 1 jerk, I'll toss out some half baked ideas -- not meant to be refutation, but merely food for further thought.
1. Workers are going to be paid to rebuild the depreciated factories. For your ultra simple economy, things don't balance, but with multiple factories needing a rebuild at different times, you have factory builders who are consumers. Does this produce balance?
2. The Amish have an interesting solution: capital is free in their economy, but people are under social pressure to freely set up the "factories" (aka barns) of those getting started.
3. What did the Romans tax in order to fund their armies which brought in slaves and loot? Here in the US, we tax the crap out of labor to fund the armies which make it possible for the Fed to print petrodollars. At the same time, we give capital all sorts of tax deferrals and lower rates.
1. Maybe. Douglas says no, his critics say yes, and I'm not sure.
2. Interesting!
3. From our point of view, the Roman state was essentially just what we would call the Defense Department (75% of its whole budget was the legions) and when Rome was in its prime, taxation was a very low percentage of Roman GDP, perhaps 2%. (If that seems implausible, remember that 3.3% of our GDP is sufficient to fund today's Department of Defense).
So while the economy was highly exploitative, the exploitation was by landowners rather than being by the state. These landowners did contribute heavily to the system in ways outside of taxation by building public monuments, sponsoring games, arming troops, and making donations to the poor. Taxation, meanwhile, was often a business - you bought the right to tax a certain area for a flat rate and then you earned your profit by collecting more than your licensing fee.
Maybe I should do a more in-depth article on Rome at some point.
Just a comment, I recently paid the local Amish group to build a new desperately needed barn. I was taken aback on the quality, attention to detail and thoroughness of the group. They even came back a month later to check if there was any issues. I would not hesitate a second to use them again.
In the earlier republic, before Rome beat Carthage, men had to supply their own arms and could not enrol in the army unless they were capable of equipping themselves: the farmer-soldier model. No (or very little) taxation was necessary to keep the armies in the field.
The price of beating Carthage and conquering much of the Mediterranean as a knock-on effect was that the farmer-soldier model decayed.
Men were always out on campaign and obviously couldn't tend their farms at the same time. Campaigns brought in huge numbers of slaves. While the army was campaigning, sneaky well-connected oligarchs bought up or just took over the farms of dead soldier-farmers, occupied state land as their own, and worked the resulting huge farms with slave labour to produce not only simple meat, dairy and grains but also olive oil and wine for the market. Returning soldiers couldn't compete and sold up. Their farms were incorporated into latifundia.
By the late republic there were few small farms and few soldier-farmers. Enrollment in the army was opened to all, and soldiers had to be equipped and paid by plunder from the new de facto imperial provinces. The republic didn't last long after that.
> Workers are going to be paid to rebuild the depreciated factories. For your ultra simple economy, things don't balance, but with multiple factories needing a rebuild at different times, you have factory builders who are consumers. Does this produce balance?
In classical economics terms don't A and B just reflect the returns to labour and the returns to capital, respectively? Isn't the disparity simply profit? In other words isn't this theory just a rewording of the Marxist concept of exploitation (as an economic quantity, as well as a moral criticism)?
No, I don't think so. At the least, he very explicitly repudiates Marxism and repudiates the notion that the problem with the system is profit. His issue (as I understand it, see caveats etc) seems to be how financial capitalism works, rather than how business earns profit.
Then doesn't prove that his system is functionally identical to it.
The thing is basic Marxist principles are rather intuitive and appealing, on the other hand they're disastrous when actually implemented, which has given Marxism a deservedly bad reputation.
Thus, there is a market for what could be called "off-brand Marxism", i.e., philosophies that are functionally very similar to Marxism and share its appeal but insist that they're completely different and thus won't end up like Marxism did.
That's the way I understand it too. Douglas is right that profit from productive free enterprise is not evil, regardless of its source (ie even if Marx and the classical economists are right that the source of profit is labour).
The problem *might* be (I'm not qualified to say for sure) whether social credit can be applied, without fiat money, in a world where digital technology has created economies of almost unimaginable complexity and scale.
I would be interested to know what you think about Douglas's proposals in the light of scale and technology he didn't (and of course couldn't have) accounted for. Plz don't write another fucking article about fucking Trump instead.
He's not saying the excess is skimmed off the top, but rather the surplus of goods crashes the price below break-even. So we buy with debt to keep the price profitable.
Regarding your intro: it reminds me of Robert Anton Wilson's Constructive Gullibility. To fully understand an idea, one must temporarily believe it. Critical thinking should happen after initial understanding.
I hadn't encountered that turn of phrase, but now that I have I agreed completely.
RAW also proposed, through a character in his Schrodinger's Cat trilogy, that each factory worker should own a robot, have it work in his place, and collect the same hourly wage -- about four times his old income, since the robot could work nearly all the time.
I have developed this into a more elaborate economic proposal for organizing self-reproducing production systems with an internal machine-time-backed currency for an internal economy of small entities trading time on each others' machines through an automated market, allowing everyone access to vastly more real capital, and the ability to each make complete new production machines (and new types of machinery) as well as most other goods. I have called it the Wide Ownership Workshop Industrial Ecology, or WOWIE, but the acronym is a bit embarassingly cute, I admit
Your acronym conjures up the Derek Flint movies.
I hadn't heard of the Derek Flint movies, '60s James Coburn playing a supergenius James Bond, working for ZOWIE, he sounds even better than RAW's Fission Chips (agent 00005) fighting BUGGER (Blohard's unreformed goons, gangsters and espionage renegades)
Austin Powers called In Like Flint his favorite movie.
(BTW, Austin's band name is Ming Tea, which is a reference to the underappreciated classic, "The 10th Victim.")
Quite appropriate when discussing RAW.
The macroeconomic story of industrial capitalism has always been and can only be the story of surplus supply chasing insufficient demand (purchasing power).
Which is why the story is actually one of consumer credit bubbles inflating then bursting.
Without some combination of exports and financial usury amounting to loan sharking, there aren't enough buyers to be found.
But eventually the service on consumer debts is too much and goods stop moving.
Your post about C. H. Douglas last week was the first I'd heard about Social Credit in a while.
The first I read about it was six or seven years ago, but back then I'd only seen its criticisms of central banking and fiat money. Basically, the idea was that, if a nation's money supply depends on money being lent into existence by the central bank, such that the amount of money owed to the bank (at interest) is always greater than the amount of currency in existence, then the average person will always be in debt (not to the central bank itself, but to intermediaries along the chain). Thus, the total amount of debt always grows, and no matter how frugal individual citizens may be the best that they can do is beat each other in the rat race while the banks continue to exploit the average worker. Meanwhile high high inflation becomes necessary to keep the system from collapsing entirely.
It seemed like a very reasonable way to explain what's going on in a country that's had central banking since 1913 and de facto fiat money since 1933. And it's influenced a lot of my own economic thinking since then; I even have an article at my own Substack explaining why William Jennings Bryan is one of my favorite statesmen. (Basically, if he had won the presidency in 1896 or 1900 and implemented free silver, that might have halted the series of deflationary crunches that ended up making the Federal Reserve necessary, and I also really admire his anti-imperialism).
https://twilightpatriot.substack.com/p/in-the-shadow-of-william-jennings?utm_source=publication-search
That said, this A < A + B theorem seems, at least on my first reading, rather simplistic. Since I study physics and biology for a living, I'm used to looking at simple mathematical models of complicated systems and having to make a judgment about whether they make sense, and the ones you cited here don't, at least to me. In reality a commercial enterprise is going to have a lot of negative cashflows that can't be easily divided into A and B - wages, profits and dividends, material costs, taxes, rents, interest on loans, money saved and/or invested against eventual depreciation, etc. And pretty-much all of that money is going to end up in the hands of some consumer or another at some later point - for instance, a company might deal with depreciation by taking out a loan to build a new factory, and then pay back the loan with interest, so that some of that money ends up in the pockets of the construction workers, some of it pays for materials, some of it pays the bank's employees, some of goes to the bank's investors and stockholders, and so forth.
So I think the only way you get a whole bunch of money disappearing with every cycle, and leaving consumers with less and less of a share in the economy, is if there are pieces missing from your model. Which there always will be. After all a model of the economy, or an ecosystem, or sometimes even a single living cell will never capture all the details - the real test is whether or not its failures are big enough to produce a physically implausible result. (see "attofox problem" for a humorous example.)
This isn't to say that the economy never gets worse over time for ordinary workers. I actually think in the United States it's been doing that since the 1970s, which I attribute to (1) global dollar dominance making domestic manufacturing uncompetitive vs-a-vis imports and (2) a steadily increasing regulatory burden which makes a lot of productive labor, especially building infrastructure like railroads and power plants, impossible. And I agree with your thesis from a month ago in "Gross Domestic Fraud" about how official GDP numbers are gimmicked to cover this up.
Given:
A -> Costs of Wages, Salaries, Dividends, etc.
B -> Costs of Raw materials, machinery, plant maintenance, and loan interest.
Douglas noted that A < A + B.
Lemma: Per what you have noted in your previous writings Pater @Tree of Woe , The following holds true, given the primacy of the Petrodollar:
A + B < A + X, where X -> Additional Purchasing Power garnered from Exorbitant Privilege.
Using the Squeeze Theorem, however:
A ~=< A + B ~=< A + X
A ~=< A + X
Which gets us to...
0 ~=< X
X tending towards '0' ... in other words you can use Douglas' arguments to mathematically 'prove' that for any nation with A < A + B, A + B < A + X, X tends to '0' ... QED 😉
tl;dr: If the A + B Theorem is correct, then for any A + B < A + X, All such 'X' will eventually tend to '0; making The DOOM Cometh a Mathematical certainty 😍
I do think that's how it might work out but I'll reserve final judgment until I've read more.
A useful tool for graphically modeling flows of resources - and it has a free version.
https://vensim.com/
Great article.
Thank you.
Thank you!
The robots work in the factories, the robots stock the shelves, the robots take the majority of the products, unsold and put them in the trash. The robot trashmen take the trash away.
A few human survivors raid the trash-heaps, searching for intact goods, avoiding the robot guards.
Mercifully, before we have such a future, lack of talent will in all likelihood prevent AI dystopia.
Supply and Demand once more raises it's head.
Not speaking of the theorem itself, others will do better on that front, instead an observation on supply and demand that always comes to mind when the words are mentioned. Like a magic spell, a vision in the supermarket.
Several shelves of what can be termed 'hypervegan' food, fake burgers from heavily processed extracted pea-protein and the like.
The volume of goods in comparison to the minority of a minority who eats them...
Not just in this, but masses of supply flying from factory to shelf to landfill.
The international industrial must be terrifying in the concrete numbers of utter waste on edibles and inedibles that never make sale.
Even if you give unlimited funds to the consumer, surely supply will still be nightmarishly beyond demand?
Even the obese have a limit on how much soda they can drink and how many plastic toy models they'll buy.
If the AI 'utopia' transhumanists, futurists and technocrats desire truly came to be, you wouldn't need a coffin, mankind would be buried under a flood of supply.
As if UBI would fix such a dire structural issue, it's basically sticking fingers in ears and singing la la la!
Yes, AI will replace certain types of jobs, maybe lots of them, but given what happened during the industrial revolution, I don't think AI can exceed that upheaval. In about 200 years we went from 90%+ of the population working in agriculture to about 3%. The jobs of most craftsmen producing our material goods completely disappeared. And yet today we have an even larger population, we are not starving or impoverished, and we posess material goods that our ancestors couldn't even imagine. So what happened? The new technology created new jobs. That seems to be how every major technology works, from the development of agriculture to microchips. Why should AI be different?
Next, as you point out we live in an age of oversupply. One would think that this practice would ultimately lead to bankruptcy, but so far it hasn't. What is funding this discarded oversupply? There are a number of possibilities I could think of: 1) Finance. Money is borrowed (and simultaneously created) to fund ongoing operations. We may not be financing today's oversupply with today's revenues, but with promises of repayment from future revenues. 2) Subsidies. The modern system of taxes and tax deductions may make this waste less expensive than it should be. 3) Higher prices: The market for goods today is hyper-competitive. For large companies, marketing is a major expense, often more than materials or production. Producers fight for shelf space or eyeballs, so they need to give the appearance of large demand. Whatever doesn't sell is considered an expense that is factored into pricing.
Your points #1, #2, and #3 are exactly those which Douglas discusses. I haven't gotten there yet, but that's about what he says.
Let us know when he gets to the ideas of financial capital and it's cut of the revenues. As technology progresses, our industries become less labor intensive more capital intensive. Since it's unrealistic (and less profitable) today to save funds for things like "building a new factory" everything is financed. Thus, an ever increasing amount of revenue goes to capital, or more specifically, the owners of capital. Right now this is the big problem that economists are trying to tackle. The biggest driver of this is our current debt-based (not fiat, that's a misconseption) money system, where an unlimited supply of debt is available to those with sufficient credit.
Interesting to hear you ran your ideas through a "toy economy". I started that years ago and eventually created a computer generated "Sim Economy" with dozens of companies and hundreds of individuals. I would change some of the parameters like injecting capital, or bank failures, or increasing productivity in certain industries to studybthe result. It started small but grew over the years. Very enlightening. However, you can't create a test economy from the ground up. You need to set up your initial conditions and then let it iterate.
I'm in full agreement with you on the problem of financial capitalism. I've alluded to it in my writings on the petrodollar.
It's very impressive that you created Sim Economy -- did you learn much from it? Any particular findings that were surprising, or that justified or rejected beliefs you'd had?
Thanks, it was more like a part-time hobby that went on for years. I did it for the same reason you did, to better understand economic theories concerning money flow. I could fill several blogs talking about it, so I'll try to just stick to the highlights.
The first Sim 1.0 was much like yours, except that it was larger, and I added "banks" as pure financial intermediaries (no money creation function) to the system. Interest paid was always less that interest charged, with the difference going to bank wages. Money for maintenance/upgrades was borrowed, and a portion of profits after expenses and debt payments put into the bank. This type of model works well for understanding how money flows in a closed system. I found that Von Mises' circular money flow always holds. However, it's a static model, so it's of limited utility. You can't make changes outside of the initial conditions. For example, changing the price of a good or service.
In the next iteration Sim 2.0, I wanted to see dynamic money flow changes. This required creating a table of Supply/Demand functions for each entity (I limited it to 3: Flat, steep, and a Median, all linear.) Doing this I could inject money into the system at different points and times. When new money was put into the system, I could observe the ripples of inflation traveling through the system, until the system stabilized at new equilibrium price points. This was analogous to dumping a large bucket of water into a half- filled bathtub - large disturbances at first, but eventually it settles at a new level. I could also introduce new entities into the system and increase production. I found that the model agreed with 1) inflation (not price increases) only happens when you add money to the system, i.e. Friedman. 2) Inflation moves through the economy at a rate based on the frequency and size of the transactions. Those closest to the source benefit the most because of 3) Assuming a significant portion of extra profits are put in the bank, after stabilization nothing changed except the distribution of asset ownership in the bank. In other words, it only resulted in a transfer of assets (wealth). In another scenario I had the bank president stealing a portion of the bank holdings and spending them. Same outcome - money was just redistributed. 4) Financing allows you to create new supply without any underlying demand, economic demand being "I have money and am ready to buy it", not "I want it". This actually creates demand as per Say's Law. For example, I would assume 10 additional individuals enter the workforce (children becoming adults). They begin as unemployed but start a new business by borrowing from the bank. The system shifts slightly but remains stable because of the wages and spending of the new workers. This can continue until the bank runs short on funds, which creates a high demand for money and overall deflation. There is a limit to growth without new money or money equivalent being added to the system.
In iteration Sim 3.0, I wanted to measure money velocity and its changes per the Fischer Equation and introduce fractional reserve banking. I could find no information on real world ways to manipulate or control money velocity, and I concluded that it's just money that is not being used, but just sitting somewhere. I found that when money is injected into the bank, or parked in the bank, the money velocity decreases. When that money is loaned out or withdrawn and spent, the money velocity increases. Insisting that increasing M into the system and parking it in reserves causes V to decline, not the other way around, got me into arguments with many economists, who could never explain the contradictions. I concluded that most Fed and academic economists are institutional morons. Finally, I tried to implement fractional reserve banking, but I could never get the simulation to stabilize. It always blew up either with hyperinflation or a unsustainable debt. This is of course not proof that it cannot be done, but I haven't figured out the assumptions that need to be made in order for it to work.
I've concluded that mathematical economics is really only good for describing money flows. It cannot anymore model growth in an economy than mathematics can model growth in a biological organism, because it can't factor in human nature, which has led to the development of behavioral economics. Ideological "economists" and the politicians they advise reflect this. All of the most respected of them talk in terms of money flows - interest rates, GDP, reserve ratios, money velocity, etc. They don't have any understanding of incentives or know how to achieve economic growth. Because they can't model it, to them, economic growth is something that "just happens". Kamala's economic advisors can't even give her a plausible sounding plan to get inflation under control.
Is the A+B theorem valid? As modelled, using a certain set of assumptions, maybe not completely. But it certainly has reasonable predictive validity. We are in a time of massive production and massive debt. The theorem accounts for these facts pretty well. So do other theories I guess; I'm no expert.
Anyway, to me A+B is most interesting for its practical implications. There are two ways of making up for missing demand: lending fiat money on a fractional reserve basis at interest, immiserating individuals and nations as interest compounds and eventually becomes unrepayable; or...another way.
Social creditors in Canada and New Zealand--and even early Quebec, a couple of hundred years before Douglas--regarded money merely as a medium of exchange for goods and services, not as a legitimate source of profit. The idea, then, was to introduce only as much currency (in Quebec it was playing cards cut into pieces!) as the system could circulate at any one time, and to lend it at very low or no interest. This would correct the demand imbalance while stimulating new enterprise, without introducing unrepayable debt. The Canadian and New Zealand experiments were foiled before they could really get going.
A certain mid-20th century person from a certain Central European country did much the same thing, to great effect. But he didn’t do so well in certain other spheres of activity and anyway he was evil so enough no more about all that sorry for mentioning it
Yes. You have deduced exactly where Major Douglas ends up...
A spinning wheel increases the supply of thread, but puts hand-spinners out of work, leaving fewer able to buy the cheaper thread. But you can't give the thread away for too cheap, because then there'd be no money to repair the wheel. So we give the impoverished people credit, which the wheel owner concentrates as wealth. The usury is the financial distortion that accompanies the machine's labour distortion. (And then it's off to the races and cycles of penury.) That's the gist of it?
Jaques Ellul once said the distinction between modern and ancient industry is that we consider the 'best tool' to be 'what's best for producing the object' while they considered 'what's best for edifying the subject.'
The impetus for industrial production seems to have stemmed from a desire to prove one's worth - free of class or family or other Subjective distinctions. Making superior objects provided Objective Truth of one's superiority. It led to a mania for standardized measurements and competition along those measures. Precision and efficiency became fetishized - since they're demonstrable, inarguable, and win wars. To this day, we use technological competence as our benchmark.
All this to say: the whole A+B price problem is irreconcilable. As you astutely observed, we did this with slaves before we did it with machines. The equation of civilization is balanced by sacrifice: theft, usury, and conquest, etc., or by self-sacrifice: charity, jubilee, colonization etc. Either way, someone has to simply eat the cost to result in a net-producer instead of net-consumer society.
I think you've expressed the gist of it in a way Douglas would agree, yes.
> But you can't give the thread away for too cheap, because then there'd be no money to repair the wheel.
Of course, some needs to repair the wheel, and he will also get paid.
By the way, is this the same Social Credit that a Canadian regional political party of latter years was named after?
Yes, it is. Douglas helped co-found that party. However, the party later repudiated Douglas on the grounds that his views were anti-Semitic.
So far the commenters on Douglas Social Credit can be divided into two groups -- the first group which knows he's obviously right, and the second group that knows he's obviously wrong!
Next essay I'm picking a more agreeable topic, maybe Trump or something.
I'm going to have to work through these simple economies several times in order to get a full handle on this problem.
But being a Level 1 jerk, I'll toss out some half baked ideas -- not meant to be refutation, but merely food for further thought.
1. Workers are going to be paid to rebuild the depreciated factories. For your ultra simple economy, things don't balance, but with multiple factories needing a rebuild at different times, you have factory builders who are consumers. Does this produce balance?
2. The Amish have an interesting solution: capital is free in their economy, but people are under social pressure to freely set up the "factories" (aka barns) of those getting started.
3. What did the Romans tax in order to fund their armies which brought in slaves and loot? Here in the US, we tax the crap out of labor to fund the armies which make it possible for the Fed to print petrodollars. At the same time, we give capital all sorts of tax deferrals and lower rates.
1. Maybe. Douglas says no, his critics say yes, and I'm not sure.
2. Interesting!
3. From our point of view, the Roman state was essentially just what we would call the Defense Department (75% of its whole budget was the legions) and when Rome was in its prime, taxation was a very low percentage of Roman GDP, perhaps 2%. (If that seems implausible, remember that 3.3% of our GDP is sufficient to fund today's Department of Defense).
So while the economy was highly exploitative, the exploitation was by landowners rather than being by the state. These landowners did contribute heavily to the system in ways outside of taxation by building public monuments, sponsoring games, arming troops, and making donations to the poor. Taxation, meanwhile, was often a business - you bought the right to tax a certain area for a flat rate and then you earned your profit by collecting more than your licensing fee.
Maybe I should do a more in-depth article on Rome at some point.
Do that. I haven't been thinking about the Roman Empire enough lately
That in-depth article on Rome would rock!
Just a comment, I recently paid the local Amish group to build a new desperately needed barn. I was taken aback on the quality, attention to detail and thoroughness of the group. They even came back a month later to check if there was any issues. I would not hesitate a second to use them again.
That's a whitepill. Thank you!
I'm recalling misty-eyed the barn-raising scene in Witness...
In the earlier republic, before Rome beat Carthage, men had to supply their own arms and could not enrol in the army unless they were capable of equipping themselves: the farmer-soldier model. No (or very little) taxation was necessary to keep the armies in the field.
The price of beating Carthage and conquering much of the Mediterranean as a knock-on effect was that the farmer-soldier model decayed.
Men were always out on campaign and obviously couldn't tend their farms at the same time. Campaigns brought in huge numbers of slaves. While the army was campaigning, sneaky well-connected oligarchs bought up or just took over the farms of dead soldier-farmers, occupied state land as their own, and worked the resulting huge farms with slave labour to produce not only simple meat, dairy and grains but also olive oil and wine for the market. Returning soldiers couldn't compete and sold up. Their farms were incorporated into latifundia.
By the late republic there were few small farms and few soldier-farmers. Enrollment in the army was opened to all, and soldiers had to be equipped and paid by plunder from the new de facto imperial provinces. The republic didn't last long after that.
> Workers are going to be paid to rebuild the depreciated factories. For your ultra simple economy, things don't balance, but with multiple factories needing a rebuild at different times, you have factory builders who are consumers. Does this produce balance?
Yes, by a basic accounting identity.
In classical economics terms don't A and B just reflect the returns to labour and the returns to capital, respectively? Isn't the disparity simply profit? In other words isn't this theory just a rewording of the Marxist concept of exploitation (as an economic quantity, as well as a moral criticism)?
No, I don't think so. At the least, he very explicitly repudiates Marxism and repudiates the notion that the problem with the system is profit. His issue (as I understand it, see caveats etc) seems to be how financial capitalism works, rather than how business earns profit.
> he very explicitly repudiates Marxism
Then doesn't prove that his system is functionally identical to it.
The thing is basic Marxist principles are rather intuitive and appealing, on the other hand they're disastrous when actually implemented, which has given Marxism a deservedly bad reputation.
Thus, there is a market for what could be called "off-brand Marxism", i.e., philosophies that are functionally very similar to Marxism and share its appeal but insist that they're completely different and thus won't end up like Marxism did.
That's the way I understand it too. Douglas is right that profit from productive free enterprise is not evil, regardless of its source (ie even if Marx and the classical economists are right that the source of profit is labour).
The problem *might* be (I'm not qualified to say for sure) whether social credit can be applied, without fiat money, in a world where digital technology has created economies of almost unimaginable complexity and scale.
I would be interested to know what you think about Douglas's proposals in the light of scale and technology he didn't (and of course couldn't have) accounted for. Plz don't write another fucking article about fucking Trump instead.
He's not saying the excess is skimmed off the top, but rather the surplus of goods crashes the price below break-even. So we buy with debt to keep the price profitable.