Re: (OPE-L) Ajit's paper (costs)

From: Phil Dunn (pscumnud@DIRCON.CO.UK)
Date: Wed Jun 09 2004 - 02:24:31 EDT 

>--- Phil Dunn <pscumnud@DIRCON.CO.UK> wrote:
>
>  >
>>  Hi Ajit
>  >
>>  Not good enough.  You fail to distinguish between a
>>  general rise in
>>  prices and a rise confined to just x and y.
>>  If the rise is confined to x and y then the rate of
>>  profit is indeed
>>  20%.  Whether the business person decides to
>>  continue operations
>>  depends, inter alia, on whether she can make a
>>  profit when x and y
>>  are $40 instead of $25.
>>  That depends on the dollar price of z in the second
>>  period and
>>  inflation).  The money capital required can be
>>  borrowed.
>_____________________
>I don't mean general inflation. I mean changes in
>prices of x and y. Let's suppose I go to you to borrow
>money for my next round of production. I tell you,
>look I just made 20% profit in this business, so
>please lend me some money to reinvest in it. Given
>that you follow TSS logic, you gladly lent me the
>money. But again the same thing happened. The prices
>of x and y rose to $80 each and my z is now priced at
>$96. So I again go to you asking to borrow more money
>to carry on my business. Tell me for how long you will
>keep faith in TSS and keep lending me money? Economics
>needs to know which sector is viable and which is not.
>The viability of a sector depends upon whether it can
>keep producing at the same level. So you will see that
>what I wrote was good enough once you start to think
>of yourself as the person who may have to lend money
>to a TSS business fellow. Cheers, ajit sinha

Hi Ajit

Of course, rising costs are a concern to a business and its bankers
-- but only if the costs cannot be passed on to the customers.  Here
we have a case where we assume costs can always be recovered and
where there is a historical cost profit and a replacement cost loss.
In every year loans can be repaid with interest with a bit left over
for the proprietor.  This is a rock solid business proposition.
Everybody is in the money (except the workers who are assumed to live
on air).  There is no inflation and so the value of money is
unchanged.

Thanks, Ajit, you have provided a refutation of replacement cost accounting.

Phil

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