Blade: Trinity

The puzzle of language evolution

Published on February 23, 2005 By geser nart In Philosophy

J.M. Keynes vs C.H. Douglas

4470. Mr Keynes: Is it not probable that those of us who are criticising are not inclined to accept the inherent difficulty which you develop in paragraph 16 of your Memorandum. You divide payments there into A and B payments.

Douglas: Yes

4471. Mr. Keynes: The cost of production to the manufacturer is A plus B. Of that A goes to the public and is spent by them on manufactured goods, but B goes elsewhere?

Douglas: Yes

4472. Mr. Keynes: Where else does it go?

Douglas: I felt sure that this would arise, because it generally does arise. May I put it this way? The wording of this statement is very careful. I always make the wording very careful. I say, "Since A will not purchase A+B, a portion 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." I have not said it must be paid.

4473. Mr. Keynes: I did not want to go as far as that. Just previous to that you see "Group B", which includes raw material; I assume you mean imported raw material; is that right? "Group B. All payments made to other organizations (raw materials, bank charges, and other external costs)"

Douglas: Yes; simply what we should call in a company bills payable at the end of the month.

4474. Mr. Keynes: If they are paid through another business, then that business will pay the amount as part of its cost of production to individuals? Is that it?

Douglas: Yes, I quite understand the difficulty. The real weight to be attached to this undoubted statement of fact is whether the transfers from one firm to another are financed by either trade credit, or from a firm’s own credit, let us say it’s working capital, or by a bank’s credit. The exact weight which that has in the whole of the statements depends on a very large extent on that. If B payments are really financed from working capital, then that working capital must, I think, inevitably have been obtained by the process of investment which is criticized under (

in the same precis. That is to say, the whole of the savings which have formed the working capital of that concern must previously have appeared in the cost of production.

4475. Mr. Keynes: That would be true, but I thought the emphasis here was on the phrase “other organizations”, and what you were saying has no bearing on that.

Douglas: I’m sorry! I missed that.

4476. Mr. Keynes: I thought the force of the argument here was that it was payment made by this manufacturing firm to other organizations?

Douglas: Yes.

4477. Mr. Keynes: It’s working capital is required to meet its expenditure under Group A during the period of production just as much as Group B, so what you are saying now does not seem to me to distinguish between Group A and Group B?

Douglas: Yes it does, because in Group A you are paying out to the consumer; all the payments under Group B are purchasing power, which, if it was obtained by re-investment, was originally in the hands of the public and never gets back into the hands of the public at all.

4478. Mr. Keynes: Other organizations which were receiving money under Group B are getting back that amount from this first one?

Douglas: Yes, that is the case; but there is a large amount of purchasing power which is permanently retained purely in the productive system, and never gets out into the consumer system.

4479. Mr. Keynes: If all firms were united in a single firm would your difficulties be overcome?

Douglas: That is the obvious remedy for the financial difficulty but not necessarily the right remedy. Even from a purely financial standpoint it is a little difficult to say; you understand a time lag comes in.

4480. Mr. Keynes: Do you think it would vanish?

Douglas: No, I do not think it would completely vanish.

4481. Mr. Keynes: Why not?

Douglas: Because there would be a considerable amount of money being paid out in wages for delayed production, and your hypothesis assumes that the distributed costs of a given week are the total prices of the goods for sale of a given week.

4482. Mr. Keynes: It would be diminished?

Douglas: It probably would be diminished I think yes.

4483. Mr. Keynes: Insofar as the fact that you have a differentiation in industry means that some people have to have bank accounts which they pay to others, it means you have to create a certain amount of credit and it really acts as a revolving fund?

Douglas: Yes.

4484. Mr. Keynes: If a revolving fund has been established why do you have to add to it?

Douglas: If the revolving fund is as large as the total amount of money required to finance the whole business from the time the first process takes place to the time the article goes out to the consumer, it is possible - I should not be inclined to admit it offhand - that the question might disappear; but that is certainly nothing like the actual case.

4485. Mr. Keynes: If you raise the volume of credit to whatever level may be required by your profit in relation to the volume of production you have only to go on increasing in it in proportion as production increases?

Douglas: No, there are all sorts of questions that would still arise. The question of turnover, depreciation, and the fact that the purchasing power of credit, or whatever you like to call it, which has been transformed into price values of fixed assets in the industrial system would in existing circumstances have to enter into the cost of goods - and cost items of that type would always raise the price of the articles above the amount of purchasing power.

4486. Mr. Keynes: And if in the interval you had to have new machines to replace old ones you would have to have individuals to produce them. How does that differ from any other form of consumption?

Douglas: Because you are not starting from zero. You are starting from a world as is.

4487. Mr. Keynes: How does that bear on the matter?

Douglas: It bears on the matter that you have a tremendous amount of real capital which at the present time is creating prices and which has not contributed anything like that amount of purchasing power.

4488. Mr. Keynes: Do you mean that the receipts of capital are greater than the amount it pays out in dividends?

Douglas: Yes, that is an obvious statement of fact; the accounts of any company will show that.

4489. Professor Gregory: What happens to the difference?

Douglas: It is represented by the fixed assets in the company which it cannot distribute in the form of money.

4490. Professor Gregory: It does not distribute it to it’s shareholders, but if a company earns $100,000 in one year and puts $50,000 towards increasing its plant does not that $50,000 flow out in additional wage payments?

Douglas: No, that does not happen at all. What really happens is that during a given years working it is necessary to create a number of things like tools, or jigs, or something of that sort, which must be charged in the cost of the product to the consumer. The same result is obtained if profits are invested in new tools.

4491. Professor Gregory: That is perfectly true. What I am asking you is this: When a motor car company makes new patterns, and so on, it has to pay its workmen for them just as much as for other things; consequently, it does flow back to the consumer?

Douglas: No, it does not flow back if it is charged to it’s fixed capital. A company at the end of a year shows a profit of ,say, $10,000. We all know perfectly well that probably $8000 of that is in fixed assets. It distributes of that profit $2000 in the form of dividends; it is quite obviously only distributing $2000 out of $10,000 which appeared in prices.

4492. Professor Gregory: What happens to the $8000 which it does not distribute?

Douglas: That is in the form of fixed assets, which it is incapable of distributing except by getting a creation of credit to distribute them.

4493. Professor Gregory: It does not want to distribute these things. What you want, to get the equilibrium between the income of the company in the first instance and its outpayments is that it should pay somebody for making those fixed assets, and if it pays somebody for making those fixed assets it is in effect returning to the stream what it has taken out?

Douglas: I think I can prove the fallacy of what you are saying, if you imagine if it did distribute the whole of that $10, 000 in a year. By your argument, if it did distribute that $10,000, it would be distributing $10,000 more than it had made.

4494. Professor Gregory: It has made $10,000 profit?

Douglas: Of course it has made $10,000 assets. This is jumping from money to the goods all the time: it has made certain prices, things to which you attach prices and which are valued in its assets as lets say $8000. But the money portion of those assets does not amount to $10,000, and it has already recovered the cost of them from the consumer. It is exactly the same thing as going to a man who has had 30,000 acres of land left him by will and saying, “That is $1 dollar an acre; now you have got to pay $10,000 in death duties.” The man has not got $30,000. He has got 30,000 acres of land which has a price of $1 an acre. He has not got $30,000.

4495. Professor Gregory: Nobody ever said that he had?

Douglas: He is in exactly the same position as the works which show a possible profit.

4496. Chairman: I quite follow that, but after all, the manufacturer is himself a consumer of tools; he has spent $8000 in replacing his worn out tools by new machines, and in doing that he has given employment to people and has paid $8000 to another manufacturer. He is a member of the consuming public. The particular commodity he wants is tools. When I buy a box of tools, I am a consumer?

Douglas: Yes, I quite realize the difficulty; I felt this would arise.

4497. Chairman: I am sure you are prepared for it?

Douglas: Would you bear with me if I read an article I wrote, which I think will probably be more lucid?

4498. Chairman: If it is not too long.

Douglas: It is not long. It is the shortest form in which this statement can be put, I think. Suppose first that I have $1000, and I pay that $1000 away for the purpose of having a house built. We will imagine that the whole of the $1000 goes in nothing but wages, which does not in anyway affect the argument, and we will also suppose that by doing work on something else the workmen could live and save all that they earned by house building. Suppose now that the workmen who built the house, who collectively would have my $1000, decided to buy my house, and I agree to sell them for $1000. Notice that no question of profit arises. The workmen now have the house, and I have my $1000 back again. In other words, the workmen have got the house merely by working for it. But these workmen would express it by saying they had paid $1000 for the house. I am now out of the transaction altogether, and we will suppose I and my money removed to another planet, or we can suppose that I tore up the money when it was returned to me (which is the equivalent of the repayment of a bank loan). Suppose now that the workmen decide to use the house to make and sell shoes. If they carry on the business on orthodox business lines the cost of the shoes will consist of at least three items: (i) Wages (ii) Raw Materials and (iii) rent of factory i.e house. We will suppose for the moment that the “rent” of the house is nothing but an appropriation of money of such amount that when the house eventually falls down they will have got back their $1000. It is technically called depreciation. Since the public gets the shoes, clearly they ought to pay “depreciation”. Notice, therefore, that neither interest i.e. usury , nor dividends, nor land monopoly are imported into the question. But the simple and vital fact remains that wages paid during the production of the shoes are less than the price of the shoes by an amount, large or small, which is added to the cost of the shoes before the shoes are sold, representing, at least, “depreciation”. This amount which is added to the cost of the shoes represents overhead charges in their simplest form, and in many modern productions overhead charges are between 200 and 300 percent of the direct cost of the product. It is not profit.

4499. Mr. Keynes: By whom are the overhead charges paid?

Douglas: They are put into the cost of the product. They are not paid to anybody. They have in previous cycles of production appeared in the cost of the factory.

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