Lack of purchasing power?

As a introductory model, consider an economy that comprises two business: a manufacturer of apple juice and a farm that supplies apples.

Model A

The juicer buys #100 of apples from the farm, and pays their workers #90 for the effort of making the juice. The owner takes #10 for making it happen.

The total cost of making the juice is then:
Juice
Cost of apples100
Juice workers salaries90
Juice owner profit10
Total cost:200
To recover the total cost, the juice is sold for #200

Is there enough money for the society to buy this juice?

Looking at the farm: the workers harvest the apples from the trees and are paid #90 for their efforts. The owner takes #10 for making it happen:
Farm
Farm workers salaries90
Farm owner profit10
Total cost:100
Summing all the incomes:
Purchasing power
Juice workers salaries90
Juice owner profit10
Farm workers salaries90
Farm owner profit10
Total purchasing power:200
The total purchasing power is sufficient to buy the juice.

Model B

Now, to make the model more realistic, let's add a bank that lends the farm #40. The farm reduces its workers and produces the same quantity of apples for the same price. When the farm receives #100 from the juicer, the farm pays the bank back its loan together with #10 of interest:
Farm
Loan repayment40
Interest on loan10
Farm workers salaries40
Farm owner profit10
Total cost:100

Bank assets
Loan40
Loan repayment-40
Interest on loan10

The initial #40 loan that was created by the bank is cancelled by the repayment, leaving only the #10 interest in the Bank's coffers.

Summing all the incomes:
Purchasing power
Juice workers salaries90
Juice owner profit10
Farm workers salaries40
Bank income (interest)10
Farm owner profit10
Total purchasing power:160
The total purchasing power is insufficient to buy the juice.

However, this ignores the fact that the farm spent the bank loan into the economy. The #40 loan was used by the farm to buy equipment, services (or whatever) that allowed it to produce the #100 worth of apples.

The bank loan will appear as the income of some other enterprise which will then have #40 of additional purchasing power - sufficient to buy the remaining juice, exactly.

One can make the model more complex ad nauseam, but the end result will always be the same: there is always exactly the required purchasing power to buy the output of the economy. As argued in the commentary, there may well be timing problems, but this does not change the aggregate result.

 

Commentary


C.H. Douglas's "A + B theorem" can be stated as follows (thanks to WH)
In any manufacturing undertaking, the payments made may be divided into two groups:
  • Group A: Payments made to individuals as wages, salaries, and dividends;
  • Group B: Payments made to other organisations for raw materials, bank charges, and other external costs.
The rate of distribution of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of generation of prices cannot be less than A plus B.

Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A.

If this statement has any useful meaning, it has to be the contention that "raw materials, bank charges, and other external costs" do not eventually end up as "wages, salaries, and dividends".

But, as indicated in the model, they do. Real resources and credit do not just disappear.

Money, in a simple-minded sense, appears and disappears: the bank loan to the farm suddenly appeared from nowhere when the bank came to an agreement with the farm. Equally the bank loan disappeared when the farm repaid the loan, thereby clearing the entry on the bank's balance sheet. Trying to model money in an economic model is always going to be difficult because the model will need to include the psychological whims of the bank and the farm.

Clarification of savings and speculation needs further work.

Timing issues

The model presented has no time component: all activities happen at the same moment. The fact that production clearly involves a sequence of operations means that timing issues will affect whether sufficient purchasing power is available at a particular moment, but this is not the usually accepted import of Douglas's "theorem": the ensuing rhetoric insists that there is never sufficient purchasing power to buy the goods and services of an economy, and hence the need to export, wage war, destroy the environment, and any other collection of ills that one is moved to name.

There are many problems with the way the economy is run, but the import of the "A+B Theorem" is not one of them.

Modern Monetary Theory

MMT makes it clear that financial flows in the economy always balance: eg: