[OPE] No rise is s/v? Kliman's empirical work on the falling rate of profit

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Wed Oct 28 2009 - 16:03:44 EDT


What exactly do you want me to construct a numerical example of? It is very
simple really. If you have an asset, and your asset rises in value, you can
capitalize on the asset, you can borrow money on the strength of the
additional asset value, and you can also spend it or reinvest it. You end up
with more money than you started of with. Then you have an additional market
demand, and the fact that this market demand exists, stimulates additional
production. The only snag is, that if for some reason the value of your
asset falls, you end up with a lot of extra bills. So the game is to invest
and divest before the asset value drops, and provided you do that, you keep
generating more income. If such a system of money-making grows very large in
scope, then to some extent the distribution of claims to wealth becomes
delinked from the production of wealth. But provided the production of
wealth keeps growing at an adequate pace, the whole thing can continue - it
starts to break down, only if for some reason the growth of production is no
longer adequate to sustain all the financial claims staked on it. But even
if production declines, you can still continue the game, except that in that
case some people can grow richer only if some people grow poorer, i.e. in
that case accumulation can only proceed by a redistribution which takes
wealth off some and adds it to the pile of others, and the economy reorients
to the requirements of those who can pay. For the hardcore speculator, it
really doesn't matter if the economy is booming or slumping, all you need is
some price volatility of a type that is sufficient predictable to allow you
to buy and sell at a profit. If the bottom drops out of the market, you
divest beforehand, and then reinvest if you know that after such a large
drop asset values just have to increase in value again.

The problem with concepts like GDP is really that they weren't really
designed for an economy in which a quarter or a third of the incomes of a
country are generated by the process of trading in already existing assets
of whatever type. The concept of GDP and the concept of capital formation
were originally intended to measure the net additions to wealth
created by productive activity. But if you find that in reality a
large chunk of incomes are generated just by transferring the ownership of
assets or incomes from A to B, this no longer really correspond to any
real increase in "output". In that case, the value of the "output" can only
be conceptualized as the income or expenditure of the "service" involved in
transferring the ownership of wealth, whether inferred from actual
transactions or as imputation. And that is more or less how it works in
compiling the product account in national accounting. If the government
sector and the bank sector grows quite large, then a lot of the so-called
"output" may no longer refer to any tangible output at all, anymore.

The original aim of the product account was to provide a measure of the new
gross value added by production, where the boundaries of production are
defined by the idea that production is the process whereby recognizable
inputs are transformed into outputs at a recognizable location in the
domestic economy.

The idea is that this magnitude must be equal to the sum of factor incomes
generated by production, where factor income is the income of the factors of
production (labour and capital). Since for every factor income there is a
factor expenditure, total income must equal total expenditure, and therefore
this implies that the value of total net input must be equal to total net
output. It follows that in an accounting reconciliation, total factor income
must equal total factor expenditure, and must also equal the total sale
value of net output, at producers' prices. In this way, we obtain the three
measures of gross product (the net output, i.e. gross output less
intermediate consumption but before depreciation write-offs) which must be
equal magnitudes.

(1) The epistemic question is, how do we really know what the total sale
value of net output (the sum of output prices of goods and services produced
and sold) is? Well the social accountant obviously doesn't tally up the
prices of products sold. He doesn't have that data. All he has to work with,
is the data on the revenues from the sales of enterprises and their
expenditures, upon which he performs a grossing and netting procedure. The
point here is that the income and expenditure selected from inclusion in the
value-added calculation is only that income and expenditure throught to be
directly related to new production. But what is "production"? If for example
an enterprise buys an already existing asset, and sells it at a profit, this
be considered "production" creating net new wealth, at best you can say,
that the income it realizes represents the value of a "service" provided,
a certain monetary cost. If enterprises obtain income without recognizably
producing something as a counter-value, or if it merely realizes a capital
gain, that income should be excluded. It is not part of value-added. Hence
also the concept of "transfers" and "transfer income".

(2) The economic question is, given that the very purpose of a business is
to generate more sales revenue than its costs, and produces more output
value than the value of its input costs - its profit being sales less costs,
implying that sales values are higher that cost values - how then can we
say at all, that its expenditures and incomes are equal magnitudes, and how
can we say that the value of inputs is exactly equal to the value of its
outputs? To the extent that the business makes money, it cannot be true that
sales and costs are equal, more money was realized out of its production
than went into it, and thus the value of outputs must be higher than the
value of inputs. Labour and materials are purchased as inputs to produce an
output which is worth more than it cost to produce, and if that wasn't the
case investors would not invest in production. The answer is that the
mathematical identity of income & expenditure, and the identity of input and
output values, is achieved only by means of a specific grossing and netting
procedure, accomplished in such a way that every selected expenditure
balances against every corresponding income. This is done among other things
by treating the factor income of capital (gross profit income) as a "cost",
and thus gross profit is also entered as an item of expenditure, the "cost
of capital". Once this is done, all inputs balance against all outputs.

(3) The accounting question is, given that the inputs of one business are
the outputs of another business, and the incomes of one business are the
expenditures of another business, in the same accounting interval, how
exactly then can the gross and netting procedure yield a measure of the
total net output at all? Conceptually at least, this issue is solved by
starting off from what is defined as the gross output of production, roughly
the total gross sales revenue (or, what is but the equivalent, the total
purchases) of all institutional units within the boundary of production, and
deducting from this all items classified as intermediate consumption,
enabling us to say that for every intermediate input there exists an
intermediate output. Thus by means of this deduction we obtain the gross
value added, and by further deducting gross labour income and net indirect
taxes paid, we are left with a residual, which is equal to gross profit
income before depreciation. If we deduct depreciation, we obtain the
"operating surplus", and if we deduct the income tax component we are left
with net profit income.

This being said, it is as clear as day that the measure of the net new
wealth created in an accounting interval depends completely on how
we define the boundaries of production, and consequently, what
transactions we decide to include in the calculation. The point
there is, that the statistician often already at base level disregards
some of the business incomes and expenditures on the ground
that they do not contribute to value added or capital formation,
or are not part of production. And thus the factor incomes
and expenditures included in the product account in reality
do not necessarily match up with the real incomes and expenditures
of enterprises. And therefore the profit volume measure doesn't
tally with the true profit volume, although we assume that there
must be a reasonably good fit between the trend in the
accounting measure and the true volume. But that assumption
starts to break down if there are changes in the economy such
that a lot more "production" occurs which isn't really


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Received on Wed Oct 28 16:07:04 2009

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