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Commons Futurity pg.526-528

Commons Futurity VII. The Margin for Profit pg 526-528  In this section, Commons turns to thinking about a specific aspect of modern banker capitalism addressing the question of profit's role in the economy. He starts with some terminology regarding profit share - the share of national income that goes to profit earners and the profit margin - the dynamic aspect that drives a going concern forward. We then move into another set of terms that are rate of profit and profit yield.  The rate of profit is related to the par value of stock and yield is related to market value of stock or outstanding equity. The social question to Commons is what the role of profit in keeping the overall economy and does society or community pay too much or too little for this service. Economists have long thought about the role of profits in driving the economy up or down.  Commons believes there are profit share theories and profit margin theories as two diction categories in economic thinking...

Commons Futurity pg. 510-526 VI. The Transactional System of Money and Value

VI. The Transactional System of Money and Value  The overall objective of this section is to understand money and its role and relationship to economic value in the institutional economics of John R. Commons. Commons writes that, "It is because Value is a two-dimensional concept (omitting futurity)—with two different causations, the one being the scarcity-value, or price, determined by supply and demand, the other being the greater or smaller output of use-value which will be created in the labor process that follows the transaction. " (Commons, pg. 517, 1934). The point here is again Commons is fighting against what he observes are the limits of other definitions of economic value such as simply individual utility or the classical case of exchange value only.   In this section, Commons make an important move on pages 520 and 521. He states that for a thing to be objective it needs to be independent of any objective will as opposed to other competing definitions. He will ...

Common's Futurity pg. 506-510

 V. Interest and Profit Discount This section starts with a well known adage, likely as well known today as hundred years ago, that risk and uncertainty drive a discounting of the future as compared to the present. Interest rates then a re a measure of that future risk but leading to a specific discount factor today. Commons gives the example of a laborer who is in essence also a creditor to a business or any going concern. The laborer is paid in arrears, but in the meantime is working and creating use value for the employer. A business is also doing the same thing on the commodity and debt markets. A business may borrow a certain amount form a bank promising to repay them in a short period of time.  The business will factor in repaying the loan and also generating a profit, in essence a interest and profit discount of what they are paying for materials and labor today for use value tomorrow. The business may turn out to right or wrong but this is their best forecast at the mo...

Common's Futurity pg. 500-506

 3. Scarcity of Waiting pg. 500-506 Gustav Cassel was a Swedish economist who was alive from 1866 to 1945 so roughly the same time as John R. Commons. commons felt that Cassel was important in understanding interest and waiting.  The key theme was that interest is the price of waiting.   However, from this starting point there are some important differences that matter in what context this waiting occurs. Here again we see Commons surveying and thinking about how economists have written about this issue of interest and waiting. Cassel has criticized how others have thought about interest and waiting as if it was in isolation. in fact for Cassel and Commons in turn, interest and waiting are in fact allowing others to consume or invest. In this sense, two activities are occurring at the same time. It is also important to note that those who save and those who invest are both waiting. The saver has incorporeal property in that debt is issued with their savings and they ...

Commons Futurity pg. 487-500

  IV. Scarcity of Debt and section 2. Capital and Capitals In this section, Commons starts with a discussion of Anne Robert Jacques Turgot. Turgot was the foremost of the physiocratic economics in France in the 18th century.   Importantly, Turgot unraveled the issue of what was “interest”. It was not the “price of money” but rather it was “the price given for the use of a certain quantity of value for a certain time,” (Commons, 1934, pg. 487).  Commons then turns to the idea that capital yield is a key concept.  The yield is how income in money terms is produced by any asset. The Price paid for that assert is a numerical ratio over and above the regular monetary income produced by the capital asset. This price will vary according to demand and supply. It is important to note here that it is unclear whether Commons believes this statement or is ascribing this view to others. Turgot then moved forward with some important conceptions that predate Macleod.  He talke...

Commons Futurity pg. 483-486

 Today, we move on to section IV of the Futurity chapter  and the scarcity of debt. IV. Scarcity of Debt and 1. Scarcity of metallic money Commons starts this section with a discussion of Dave Hume and how he helped divide economics between commodity economists and monetary economists. Hume made a distinction between the stability of the metallic money supply and the change in the money supply.  However, economists did not have the tools to deal with this issue. They transferred labor as in the labor theory of value for their measure of economic value. This was a major problem as it mistook efficiency for scarcity. Hume was actually arguing to address the issue of mercantilism and the idea that a country could only succeed by hoarding gold and silver. Hume disagreed with this analysis and wanted to show why it was wrong. The ultimate concluding aprt of this section is that Hume’s argument, ultimately led to a very long 19th century debate between economists over whether m...

Commons Futurity pg. 472-483

  Here we start with section III, the creation of debt. The focus of Commons turns to Ralph Hawtrey’s thinking in 1919 and understanding the relationship between debts and commodities. Hawtrey was a British civil servant and monetary theorist who lived from 1879-1975. Hawtrtey wrote that money like all creations of human beings serves as a purpose, which may change over time but is artificial and not natural phenomena.  For Hawtrey as with Commons, the purpose of money is not as a store of value but rather as a measure of debt release in an unequal transaction. Critically, a debt is a portion of wealth that is owed to another in exchange for a promise or obligation.  Money is simply the measure we use to account for a transfer of wealth from one person to another to release the debt. Common writes that for Hawtrey, the economy is a system to produce and deliver wealth to another in the exchange process. This is a very different starting point from the individual liberty o...

Commons Futurity pg. 456-472

We are now moving to section 2 of the Futurity chapter entitled “Release of Debt”.  This section is about 20 pages long. Here Commons starts by focusing on G.F. Knapp and his idea of a “pay community”. Georg Fredrich Knapp was a German economist who published an important book in 1905 titled “The State Theory of Money”.  For Knapp money is not a commodity but an “institution” that allows for the creation and release of debt or liabilities. Commons calls him the German “Macleod”. Common believes that the expansion of means and methods for the release of debt as a form of duty is the history of civilization.  He writes that both Macleod and Knapp understood that the expansion of forms of debt release were an important part of the economic story. He writes that, “Capitalism is the present status of releasable debts, and Knapp's definition of means of payment is a special case of the general principle of the changes in means and methods that have been going on through changes...

Commons Futurity pg. 443-455

 Subsection (11) separation of debt markets The section starts with Commons pointing to Henry Sidgwick who used Macleod's distinction between ownership and materials.  Sidgwick differentiated between wealth and capital; capital was the private ownership of wealth and wealth was the use value created by labor regardless of ownership. Sidgwick declares that interest is paid to the capital owner for use of their property in regards for more money in the future. Capital is defined as bonds, shares of stock and land by Sidgwick. He also recognizes, according to Commons, that a change in the interest rate will change the value of the capital to the private owner up or down. This will not result in any change from the community's point of view (does not constitute a change in real wealth). How does the capital owner convert his capital into spending power? He converts it into bank deposits and draws down those deposits. This is important as Sidgwick is trying to define money against ...

Commons Futurity pg 438-443 Section (10) from psychological economics to institutional economics

Section (10) from psychological economics to institutional economics   This section lays out Commons views on whether we need to evolve from the psychological school or hedonistic school of economics that had become important in the 19th century and early 20th century. The basic outline is that Commons believes that the psychological school provides some important insights but is based on a non-exchange economy.  Commons view on psychological or hedonistic economics is that its plays an important role in our understanding human consumption and even home production but only where there is no exchange involved. The psychological school doesn't focus on social conflict as institutional economics.  In this case you need an understanding of conflict and scarcity and ownership.  Commons also points out that we need an objective unit of measurement for exchange and courts or systems of arbitration to address conflicts over transactions. The other major point that Commons wa...

Futurity pg. 429-438 (9) discount and price

 In this section, Commons starts by again trying to clarify the mistakes made by Macleod.  The banker in making a profit moves in one transaction to lend and create money for debtor and then receive a profit at the end of that period as enforcement of the duty to pay the debt is enforced.  The merchant makes money via two transactions whereby there is a buying price for the inputs and a selling price for the outputs.  Unlike the banker, these are two separate negotiated transactions. Commons turns to the importance of a lapse of time versus a flow of time which he will continually emphasize throughout this chapter. A lapse of time relates to a debt and debt payment.  There is a specified time where an amount must be repaid to a lender at a specified rate of interest.  A flow of time is the recognition of profit as a merchant tries to gain forma  number of buying and selling transactions over time. The final section talks about the impact of the bank di...

Commons Futurity pg. 423-429 subsection (7) and (8)

  Subsection (7) from incorporeal to intangible property and subsection (8) commodity market and debt market This subsection 7 starts with a good summary of Commons thinking, "the institutional set-up gives us the idea of a going concern acting by means of inducements to participants in their forecasts of working, waiting, and risking, under rules that set limits to their bargaining, managerial, and rationing transactions. "(Commons. pg 423, 1034).  A going concern is looking forward to transacting with other going concerns ( broadly defined). and here we get to a key point for Commons. The going plant, the production function in modern economics terminology, is churning out the goods and services under technical efficiency of the managerial transaction. The going concern and the going plant are interrelated but also separable in their thinking and operations. This is a point he empathizes many times throughout the book. The going concern deals with scarcity and the changing ...

Commons Futurity pg. 420-423 - intangible property

 The next subsection we are covering is (7) intangible property.  Commons felt that Macleod made a mistake by calling intangible property as incorporeal property.  He then goes through a series of definitions to clarify what Macleod meant:  “annual income for ever”  = the expected products for one's own use or the money income from future sales of the products, or future “ground rent.”  “His credit” =  is not a particular credit against a debtor, but is the general “good credit” of a business man, that is, the good-will of investors and bankers who are expected to be willing to lend to him by buying his promises to pay.  “The good-will” = expected profitable transactions with customers.  “The practice” = the good-will of a lawyer's clients or a physician's patients, willing to pay for his services.  Copyrights and patents  = expectations of preferential or monopolistic sales-incomes.  “The shares”  = commercial company are...

Commons Futurity pg. 414-420

  This post refers to pages pg. 413-420 (4) exchangeability and (5) Double meaning of credit Subsection 4 is fairly brief and is mostly Commons defining again that Macleod made economics about exchange and that value was derived by the two parties mutually in the exchange process. He also re-emphasizes the point that exchange is the derivation of value as opposed to production with the orientation of classical economics like Smith and Ricardo. Subsection 5 is in a way a fairly complicated section but is intended by Commons to show the errors that MacLeod made. These errors meant that economists did not take him seriously and to their discredit did not follow the important advances that Macleod did in fact make.  Macleod used the term for one thing when it should have been separated into two things.  Credit can be future sales of product or output and credit can be payment of a debt.  The first one is intangible property and the second one is incorporeal property. Mac...

Commons Futurity pg. 410-413

  This is about subsection (3) duty and debt and right and credit pages 410-413. Commons, who gives a lot of credit to him, next tracks a second confusion by Henry Dunning Macleod in his book “Economics for Beginners” from 1879 which caused him to be written out of the history of economic thought. His conception of transactions and future time. Macleod argued that under common law a right to receive money from a debtor comes into existence now for a creditor but the debtor's duty to pay will only come into effect later when the due date arrives. This is a fallacy as both come into existence at the same time.  Why is this important?  It is important because a creditor can sell that duty to pay to someone else so it must be in existence now. Common wants to correct this problem by stating that in a transaction two duties are created and introducing the notion of economic status.The duties are the “duty of performance” and the duty of payment” The buyer/creditor must perform...

Commons Futurity pg 407-409

  This subsection is basically asking the question what are we to make of the past, all of the wealth and property that was created in the past.  Commons acknowledges that the past had value but his focus is on the future and futures from the present moment we are in now.  Commons argues that economics is about the future value of the things that now exist that were created in the past.  All of the economic values such as assets, liabilities, debts are based on future uses. Commons believes the past is only useful for justifying a certain pattern of ownership in the present based on past activity and practices.  The owners of today's future value may need to argue before a tribunal or court that they do in fact have rightful ownership over some object or even intangible item.Perhaps most importantly, commons identifies this problem of thinking about economics and the economy as a “prime difficulty”. Commons says too often people try and do economics by appealing...

Commons Futurity pg 401 - 407

 In this next section entitled "Corporeal, Incorporeal and Intangible property", we look at a number of things and this is very long section of almost 50 pages so we will break it down over several weeks. First, Commons is looking in subsection one at time and the measure of time.  Macleods problem was a confusion of definitions related to time and corporeal and incorporeal property. He seemed to define corporal property as of time now and incorporeal property as one year in the future, but later seems confused on this point. He seems to be saying corporeal property exists only now based on past value but then also has value in the future as well. in fact according to Commons, Macleod's double counting was not counting the physical thing and ownership of the physical thing but rather counting the ownership issue twice. Commons tries to clarify by stating that corporeal property's value is based on future value and exchangeability.  It means I have property that is wor...

Commons Futurity pg. 395-401

 Commons next turns to highlight the important of Macleod and his impact on our understanding of economics. Macleod creates the conceptual apparatus on commodity market and debt markets. Commons also acknowledges that Macleod did do a few things wrong - but let's start with what Commons believes he did right. Macleod made economics about the exchangeability of property rights and not the exchange of physical commodities.  He also made the first moments at least in economics towards what Commons would futurity or the fact that economic values are based on future uses. This was common knowledge for merchants, bankers and accountants but not in classical economics. To Quote Commons here (pg. 400), "property is the same as property rights; the material things have no value for economics except as they lawfully be owned and their ownership lawfully transferred." Macleod also specifically understood, and perhaps was the first as Commons acknowledges, that debt was a saleable co...

Commons Futurity chapter pg. 390-395

 Commons Futurity chapter in the book "Institutional Economics" is very long - over 200 pages and very complex.  However, I believe a thorough and careful reading it will yield considerable benefits.  In this blog series, we will read through Commons chapter on Futurity in Institutional Economics. This first post covers pages 390-395 of the chapter. I am using the Transaction Publishers third edition published in 2005. The chapter starts with the claim that political economy and economics in general started with a false set of assumptions form Rousseau and Locke.  The basic idea was that people were free but in chains because of government.  This meant that all rules were irrational and were a problem for humans and their behavior.  Commons did not see rules as irrational but rather as structures were based on need to organize society. Instead, Commons viewed the release of rules as a form of debt release over time that helped change and develop the economy...