What I want is a numerical example with several people in it not just
the individual whose asset goes up in price. When they sell that asset
the money has come from somebody, and when they purchase commodities out
of capital gains those have had to be produced.
My feeling is that the national accounts people have it right, that no
new income is generated by the process, at most a redistribution of
claims to income.
Jurriaan Bendien wrote:
> Paul,
>
> 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
> cannot
> be considered "production" creating net new wealth, at best you can say,
> that the income it realizes represents the value of a "service" provided,
> with
> 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
> "production".
>
> Jurriaan
>
>
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Received on Thu Oct 29 12:54:27 2009
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