Sunday, 7 October 2007

Douglas's A+B Theorem

By: Socred - B.A., SCMP

Douglas’s A+B theorem is probably the most simple, yet most controversial, of all of Douglas's ideas. Oftentimes, too much emphasis has been placed on this theory amongst Social Crediters themselves, but the theory itself is essential for understanding Douglas’ monetary policies. The theorem is a truism; however, the controversy lies in the nature of the “B payments” which Douglas identified. The theorem is stated by Douglas as follows:

“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 organizations 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.” (C.H. Douglas, “The Monopoly of Credit”)

Douglas was an engineer, and a cost accountant.. As a scientist, he started with an observation, and formed a hypothesis. This is different than many orthodox economists who form a hypothesis, and then try to make the facts fit their theory. Douglas’ A+B theory is a simple statement of fact, and the accounts of any business will verify this fact. The confusion amongst orthodox economists lies in the nature of the B payments, and what causes them.

The critics of the theory generally fall into two categories by arguing: 1) B payments are really income, so there is no differentiation between A and B payments or 2) B payments are either past, or future, income. Let’s address both these criticisms individually.

The first criticism, which states that B payments are income, implicitly assumes the quantity theory of money. According to this theory, all money received by firms is income and can be used to purchase other goods and services. The theorem states that the quantity of transactions, multiplied by the quantity of money, equals total purchasing power. On the surface, this theory seems to make sense, but upon further investigation, it is not a reflection of reality. In reality, firms have costs that must be repaid. These costs can ultimately be traced back to bank debt because all money originates as debt. If a company receives $10 for its product, and assuming accumulated costs of $8.50 to acquire and sell this product, then only $1.50 is actually profit to the company, and potential income. The $8.50 must be used to cancel debts, or replace working capital. All of the $10 received by the company is not income. The fallacy was pointed out in "The Alberta Post-War Reconstruction Committee Report".

“The fallacy in the theory lies in the incorrect assumption that money "circulates", whereas it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption. “ ( “The Alberta Post-War Reconstruction Committee Report of the Subcommittee on Finance")

The truth is that money does not “circulate” but instead operates in an accounting cycle, and B payments are monies on their way back to the bank, thus completing the cycle. Therefore, B payments do not exist as income to anyone. Income, by contrast, is flowing from the bank, and reaches individuals through the media of wages, salaries, and dividends. The argument that B payments are income is a complete fallacy based on the erroneous assumption that the circulation of money increases its purchasing power.

The second criticism, which has more credibility, will be seen to be a complete fallacy when the concept of time is introduced. Although not all B payments represent previous, or future, income (something we will touch on later), it is true that a proportion of the B payments are represented by past and future incomes. However; income and prices must be regarded as flows, and as Douglas stated:

“The mill will never grind with water that has passed, and unless it can be shown, as it certainly cannot be shown, that all these sums distributed in respect of the production of intermediate products are actually saved up, not in the form of securities, but in the form of actual purchasing power, we are obliged to assume what I believe to be true, that the rate of flow of purchasing power derived from the normal and theoretical operation of the existing price system is always less than that of the generation of prices within the same period of time.” (C.H. Douglas, “The Monopoly of Credit”)

It is obvious that future incomes cannot be used as present incomes (excluding momentarily credit from an extraneous source, which is a mortgage on future incomes). These future incomes are profits (interest on loans representing bank profit), which become future incomes via dividends paid to individuals. The fact that profits partially cause the gap between income and prices forms the supposed justification for the socialist argument against profits. However, nobody will do something unless it in some sense of the word profits him. Also, profits only represent a portion of the gap between income and prices. Douglas did not seek to eliminate profits, instead he wanted to compensate for the gap between income and prices which profits helped create.


"The essential point to notice, however, is not the profit, but that he cannot and will not produce unless his expenses on the average are not more than covered. These expenses may be of various descriptions, but they can all be resolved ultimately into labour charges of some sort (a fact which incidentally is responsible for the fallacy that labour, by which is meant the labour of the present population of the world, produces all wealth). Consider what this means. All past labour, represented by money charges, goes into cost and so into price. But a great part of the product of his labour -that part which represents consumption and depreciation - has become useless, and disappeared." (C.H. Douglas, "The Control and Distribution of Production")

Past income used for consumption represents a substantial portion of the gap between income and prices. The belief that incomes disbursed in the past for capital production are all saved up in order to defray the costs associated with those incomes as they make their way into the cost of future consumer goods is a complete fallacy. People tend to spend their income on consumer goods in a relatively expeditious fashion. This money is collected from the consumers by businesses through the agency of prices. The upper limit of prices being governed by the laws of supply and demand, or what the item will fetch. This income, recollected by businesses, forms a part of their profit, assuming they can sell their product above cost. These profits can be distributed as income in the form of dividends, but is most often re-invested back into the company, and therefore, do not exist as income to anyone.

“Consider the nature of these B payments. They are repayments collected from the public of purchasing power in respect of production not yet delivered to the public. If the wage earners in process ‘I’ use their current month’s, i.e. May’s, wages to buy their share of one current month’s production of consumable goods, they are using money distributed in respect of production which will not appear as consumable goods till October. They are in fact involuntarily reinvesting their money in industry, with the results previously explained” (C.H. Douglas, “The Monopoly of Credit”)

Therefore, it can be seen that the criticisms of the A+B theorem are based on the fallacy known as the quantity theory of money, or they fail to take into account the effect of time on income and prices (i.e. they are static). Incomes and prices are flows, and any analysis into their nature must account for the dimension of time. Since prices include all payments made to individuals as income (A), as well as all overhead charges (B), we must understand what causes these overhead charges in order to understand why prices rise faster than incomes when regarded as a flow.

"It is now necessary to see to what extent this conception of overhead charges can be extended, and I think that a little consideration will make it clear that in this sense an overhead charge is any charge in respect of which the actual distributed purchasing power does not still exist, and that practically this means any charge created at a further distance in the past than the period of cyclic rate of circulation of money. There is no fundamental difference between tools and intermediate products, and the latter may therefore be included." (C.H. Douglas, "The New and The Old Economics")

The cyclic rate of purchasing power of money can be calculated by calculating the average amount of deposits held by depositors in banks relative to the amount of clearings through the banks, minus the amount of "Butcher-Baker" transactions. Douglas referred to any transaction that broke a chain of repayments as a "Butcher-Baker" transaction. When a butcher receives money for his product from his customer, he must repay debts owed to the slaughterhouse for the meat, who in turn must pay debts owed to the farmer, who pays debts to the banker (all money originating from the bank as a debt). If the butcher buys bread from the baker with the money he has received from his customer, then he has broken the chain of debt to the slaughterhouse, farmer, and ultimately the banker; and therefore, these transactions leave a trail of debt, and must be deducted when calculating the cyclic rate of purchasing power, because the monetary cycle has not been completed. Douglas calculated the average cyclic rate of purchasing power to be approximately two and a half weeks in Britain ("The Old and the New Economics”). Therefore; any cost anterior to three weeks, must form a part of the gap between income and prices. Douglas spoke of this fact when questioned before the Alberta Agricultural Commission.

"Well, that question of course is outside what I was speaking of this morning, but I have no objection whatever to answering it shortly. The best way of understanding what the speaker has referred to as the "A plus B" theory is to look at the matter in this way: The purchasing power of the general community is practically 98 per cent, I think, taken over all products, bank money. The actual deposits in banks under what are sometimes called "normal times" (I don't know what normal times are, but they are frequently referred to so we will assume that there are normal times) the deposits remained fairly constant. For instance, in Great Britain since the war they have reached around between 16 and 18 hundred millions of pounds. Now there is quite obviously a circulation of those deposits through the agency of costs. They are distributed for wages and so forth and they come back to the same source through the agency of price. That is the way the existing financial system works.

Now all business in the world at the present time is carried on on the theory of the balanced budget, including governmental business. Therefore, you must have a right, or period of cycle through which this money which starts from the banks goes out through cost and comes back again to the banks through the agency of price; there must be a time that that cycle takes. Now we have as a matter of fact means of calculating that time, and in Great Britain the average is somewhere in the neighbourhood of around about three weeks. Now, so long as a charge is incurred and liquidated inside that period of three weeks it can be liquidated by that cycle of the flow of purchasing power, starting from the banks, going out through costs and coming back again through prices. So long as the whole transaction of costs and prices is involved in a period of about three weeks, there is no difficulty involved in the prices and the costs being equal, but any item of cost which is outside that period of three weeks we will say cannot be liquidated by that stream of credit which is constantly in circulation at a period rate, we will say of three weeks.

Now we know there are an increasing number of charges which originated from a period much anterior to three weeks, and included in those charges, as a matter of fact, are most of the charges made in, respect of purchases from one organization to another, but all such charges as capital charges (for instance, on a railway which was constructed a year, two years, three years, five or ten years ago, where charges are still extant), cannot be liquidated by a stream of purchasing power which does not increase in volume and which has a period of three weeks. The consequence is, you have a piling up of debt, you have in many cases a diminution of purchasing power being equivalent to the price of the goods for sale. It is frequently said, "Your theory must be absurd because we know that there are periods in which purchasing power is in excess of the price of the goods for sale, for instance at the end of a war." What people who say that forget is that we were piling up debt at that time at the rate of ten millions sterling a day and if it can be shown, and it can be shown, that we are increasing debt continuously by normal operation of the banking system and the financial system at the present time, then that is proof that we are not distributing purchasing power sufficient to buy the goods for sale at that time; otherwise we should not be increasing debt, and that is the situation." (C.H. Douglas, "Douglas System of Social Credit", evidence taken by the Agricultural Committee of the Alberta Legislature 1934)


If money disbursed for production makes its way to the bank before its cost can be extinguished in the price of the consumer goods it creates, then there is a corresponding gap between income and prices. If income is reinvested back into the productive system, then each time it is re-invested, it creates a new cost without creating new purchasing power (we have already seen that money does not circulate, but cycles, so money is only capable of cancelling one cost). The income I receive in terms of wages or salaries has been debited to the cost of some good or service. If I invest my income, then I expect to receive my investment back, with a rate of return. The only way the company I invested in can give me my money back with a rate of return is by charging the consumer through prices. Therefore; my income has created two costs: 1) the cost associated with the good or service that I helped provide, and 2) the cost associated with the investment that must be returned to me. However, my income can only cancel one of those costs. There is now a new cost created, without the creation of new purchasing power.

"But we also find that apart from this question of the distribution of purchasing power there is not enough purchasing power distributed to buy the goods which are for sale if the production of these goods has been financed by ordinary methods. There are many contributory causes to this situation, but it is probable that the main cause is due to the reappearance in prices of the same sum of money several times, a state of affairs which is rendered possible by the splitting up of production into a large number of processes." (C.H. Douglas, "Money and the Price System")

The reappearance in prices of the same sum of money several times creates a gap between purchasing power and prices. The re-investment of savings causes the reappearance in prices of the same sum of money, and the more production is split up into a large number of processes, the greater the probability that income disbursed in capital production will be reinvested. Douglas listed five causes of the gap between prices and purchasing power in "The New and The Old Economics":

"Categorically, there are at least the following five causes of a deficiency of purchasing power as compared with collective prices of goods for sale: -
1. Money profits collected from the public (interest is profit on an intangible)
2. Savings, i.e., mere abstentation from buying
3. Investment of savings in new works, which create a new cost without fresh purchasing power
4. Difference in circuit velocity between cost liquidation and price creation which results in charges being carried over into prices from a previous cost accountancy cycle. Practically all plant charges are of this nature, and all payments for material brought in frm a previous wage cycle are of the same nature.
5. Deflation, i.e. sale of securities by banks and recall of loans" (C.H. Douglas, "The New and The Old Economics")


We have already discussed at length reasons 1, 3, and 4. Reasons 2 and 5 are pretty much self-explanatory, both being a reduction in A, and not the creation of B costs. Add to all this the fact that overhead charges are growing in relation to income (i.e. B is increasing relative to A), due to the fact that capital is replacing the need for labour in the productive process, and it is apparent that the gap between income and prices is ever increasing, and this problem is ever worsening.

"At the moment the point to be borne in mind is that B is the financial representation of the lever of capital, and is constantly increasing in comparison with A. So that, in order to keep A and the goods purchase with A at a constant value, A+B must expand with every improvement of process..." (C.H. Douglas, "Credit-Power and Democracy")

What does this mean? If A+B must expand with every improvement of process in order to keep A, and the goods purchased with A ,at a constant value, and if A+B represent prices, then prices must expand with every improvement in process. This is why certain periods of time, when people have enough income to purchase most goods coming onto the market, are met with rising prices (i.e. inflation). Inflation is generally not caused by too much income chasing too few goods, but is caused by the ever increasing expansion of overhead costs via advancing technological processes. This means that inflation is inherent in our economic system, unless credit from an extraneous source is used to decrease, or stabilize, prices.

"Now any attempt, by current financial methods, to reduce prices (or even to stabilize them, as the phrase goes) is a mathematical absurdity unless the cost of this stabilization, or lowering of prices, is met from some extraneous source. Or to put the matter another way, the margin of profit which makes it possible for a producer to go on producing, disappears unless the financial cost, and consequently the price of production, is allowed to rise steadily in relation to direct labour cost." (C.H. Douglas, "Social Credit")

19 comments:

Anonymous said...
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Batesmotel said...

Hi There:

I just stumbled onto your website while searching for works by C.H Douglas...

This looks like a great website with loads of info....Thanks in advance...I think I will dive into many of your pdf's posted here...the ones by C.H. Douglas, anyways....

I want to learn more about the massive ripoff going on by the banks here in Canada and elsewhere in the world.

Greg Bates

Socred said...

Hi Greg:

I'm glad you stumbled upon it. I'm trying to use it as a resource to link all of his works together.

Besides the PDF files, American Libraries has published a few of his books as well.

I'm glad you see what is going on around the world. Hope you enjoy the information.

Take care.

chickhurst said...

Hey Socred, your site is looking good!

CH

Socred said...

Well, hello Mr. Hurst. Thank you very much.

It's great to hear from you again! I hope you're doing well?

kyunkyun02 said...

I am a Japanese.

I'm reading by machine translation.

And I write this by machine translation.

I'm examining A + B theorem and basic income.

The following is a criticism of the A + B theorem.

How do answer?


"For Major Douglas is arguing that the money in the hands of consumers must be sufficient not only to pay the costs incurred by the retailer - the man from whom the finished article is bought - but to pay at one and the same time the costs of the retailer, the wholesaler, the manufacturer, the producer of raw material, etc. It is clearly totally unnecessary for the consumer, however, to do any such thing.

The retailer, at least, will be satisfied so long as he can recover from the consumer his own costs of production. The wholesaler wll1 be satisfied If he recovers his costs not from the consumer but from the retailer by means of a B not an A payment. Similarly the manufacturer and the producers at earlier stages will also be recovering their costs by means of B not A payments."

http://www.alor.org/Library/Socialism%20and%20Social%20Credit.htm#1a

Socred said...

Hi kyunkyun:

I hope that you can understand my response through translation.
All costs make their way to the consumer, so while the retail price of an article is always the sum of the costs of the wholesaler, manufacturer, producer of raw materials etc…. Even though the consumer may not be currently paying the cost of current wholesaler, manufacturer and raw material costs, eventually those costs will make their way to the consumer. The consumer has to pay all costs.
The way to understand the A+B theorem is to understand that income and prices are flows. A costs represent income flowing from the bank to the consumer (all money originates from the banking system). B costs flow from the consumer to the bank. As physical capital replaces labour in production, B costs increase relative to A costs.
Douglas wrote in his first article, “The Delusion of Superproduction”:
"The factory cost—not the selling price—of any article under our present industrial and financial system is made up of three main divisions-direct labor cost, material cost and overhead charges, the ratio of which varies widely, with the "modernity" of the method of production. For instance, a sculptor producing a work of art with the aid of simple tools and a block of marble has next to no overhead charges, but a very low rate of production, while a modern screw-making plant using automatic machines may have very high overhead charges and very low direct labour cost, or high rates of production. Since increased industrial output per individual depends mainly on tools and method, it may almost be stated as a law that intensified production means a progressively higher ratio of overhead charges to direct labour cost, and, apart from artificial reasons, this is simply an indication of the extent to which machinery replaces manual labour, as it should." [26]
The criticism that you produce is the same as the one that I posted at the article at Wikipedia. The response to this specific criticism I reproduce below.
“The A + B theorem has met with almost universal rejection from academic economists on the grounds that, although B payments may be made initially to “other organizations,” they will not necessarily be lost to the flow of available purchasing power. A and B payments overlap through time. Even if the B payments are received and spent before the finished product is available for purchase, current purchasing power will be boosted by B payments received in the current production of goods that will be available for purchase in the future."[27]
A.W. Joseph replied to this specific criticism in a paper given to the Birmingham Actuarial Society, "Banking and Industry":
"Let A1+B1 be the costs in a period to time of articles produced by factories making consumable goods divided up into A1 costs which refer to money paid to individuals by means of salaries, wages, dividends, etc., and B1 costs which refer to money paid to other institutions. Let A2, B2 be the corresponding costs of factories producing capital equipment. The money distributed to individuals is A1+A2 and the cost of the final consumable goods is A1+B1. If money in the hands of the public is to be equal to the costs of consumable articles produced then A1+A2 = A1+B1 and therefore A2=B1. Now modern science has brought us to the stage where machines are more and more taking the place of human labour in producing goods, i.e. A1 is becoming less important relatively to B1 and A2 less important relatively to B2.
In symbols if B1/A1 = k1 and B2/A2 = k2 both k1 and k2 are increasing.
Since A2=B1 this means that (A2+B2)/(A1+B1)= (1+k2)*A2/(1+1/k1)*B1 = (1+k2)/(1+1/k1) which is increasing.
Thus in order that the economic system should keep working it is essential that capital goods should be produced in ever increasing quantity relatively to consumable goods. As soon as the ratio of capital goods to consumable goods slackens, costs exceed money distributed, i.e. the consumer is unable to purchase the consumable goods coming on the market."

Socred said...

J.M Keynes recognized this exact same problem when he wrote:
“Thus the problem of providing that new capital-investment shall always outrun capital-disinvestment sufficiently to fill the gap between net income and consumption, presents a problem which is increasingly difficult as capital increases. New capital-investment can only take place in excess of current capital-disinvestment if future expenditure on consumption is expected to increase. Each time we secure to-day’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium to-morrow.” [29]

This is the exact same observation made by Douglas almost a decade earlier:
"In the first place, these capital goods have to be sold to someone. They form a reservoir of forced exports. They must, as intermediate products, enter somehow into the price of subsequent ultimate products and they produce a position of most unstable equilibrium, since the life of capital goods is in general longer than that of consumable goods, or ultimate products, and yet in order to meet the requirements for money to buy the consumable goods, the rate of production of capital goods must be continuously increased. "[25]

In other words, as capital replaces labour in production, B costs increase relative to A costs. The consumer is forced to pay for all the costs of production, but income is always declining relative to overhead costs as nations because labour is becoming a decreasing factor in production. The only way the current financial system can work based upon this fact is to have capital goods produced in ever increasing quantities relative to consumer goods such that the income disbursed in capital production is capable of defraying costs of consumer goods coming onto the market. As Keynes points out, this method of achieving equilibrium is most unstable, because everytime we obtain equilibrium today, we increase the difficulty of increasing equilibrium tomorrow: eventually the cost of the capital will show up in the cost of consumer goods at a later point in time.

Socred said...

I tried translating this information from English to Japanese, and then back to English again, and it didn't make any sense.

Do you know anyone who reads English?

kyunkyun02 said...

Thank you, Socred.

I asked a basic income assenter for translation.
But I cannot yet understand A+B theorems well.

"The consumers buy finished product A+B in the A, but do not buy intermediate product A+B because they are unnecessary."

The consumers purchase only a finished product in A.
The consumers do not buy an unnecessary intermediate product in A.

The intermediate product is bought and sold between companies.
And the employee = consumers get A in the process.

With the total of A, is not it possible for the consumers to buy A+B of the finished product?

Socred said...

Hi Kyunkyun:

I understand the difficulty, and I address it specifically in an article on this blog called "Costs and Time".

http://social-credit.blogspot.ca/2010/08/costs-and-time.html

"Currently, we are forced to pay for capital twice. The accountant is mainly concerned with costs and their impact on price, but forgets that the upper limit of price is what an article will fetch on the open market. When capital is built, purchasing power (in the form of wages, salaries, and dividends) is disbursed to individuals who helped construct the capital. These individuals use that purchasing power to purchase current consumer goods coming onto the market. This activity has a tendency to inflate the price of consumer goods as this purchasing power is recouped from retailers who find that the effective demand for their product rising. In this way, the consumer pays for the capital at the time of its construction via the inflation of the price of consumer goods, and once again as the capital is depreciated over time via depreciation expenses. In fact, the inflationary effect of the construction of capital would be far worse if it were not for the negating effect on this process of improvements in efficiency which tends to reduce prices at the same time.

Since one dollar of income is only capable of defraying one dollar of cost(*read "The Alberta Postwar Construction Committee" posted on this blog), consumers eventually find that they do not have income necessary to defray these depreciation expenses in the future, because they have already used this income to purchase consumer goods at or near the time they received the income. This creates a gap between incomes and prices, and necessitates the further production of goods and services that the consumer is unable to consume in order to distribute the necessary income to purchase all of the consumer goods coming onto the market at some future point in time. Douglas exposed this gap in his A+B theorem. "

This phenomenon is the main cause of inflation in idustrialized nations, not "too much money chasing too few goods".

See my articles "Social Credit is Salvation Through Deflation", and "The Quantity Theory of Money and Social Credit".

If you need more clarification, please let me know.

kyunkyun02 said...

This is article linked to article of Douglas in Wikipedia.
What kind of article is this?

C. H. Douglas - Wikipedia
http://en.wikipedia.org/wiki/C._H._Douglas

External links:
"Guido Giacomo Preparata - Major Douglas in the witness box"
http://www.arpejournal.com/ARPEvolume2number1/preparata.pdf

AMERICAN REVIEW OF POLITICAL ECONOMY
http://arpejournal.com/v2n1.html

"Evidence Submitted to the Macmillan Committee of Finance and Industry
by C. H. DOUGLAS"
http://www.socialcredit.com.au/books/stagetwo/MacMillianCommittee.pdf

kyunkyun02 said...

The following is a part of criticism to an A+B theorem.

http://www.worldsocialism.org/canada/ws34.socred.htm

"He says that if a man borrows $10 for productive purposes in due course the loan is paid leaving $10 new goods on the market unable to be sold because the money has been destroyed by the bank cancellation. This is an absurdity which arises from the conception of bank checks as money. It should be obvious that the $10 loan gave power to use check machinery to the borrower, and equally obvious that the $10 spent productively must have bought its equivalent before the loan could be repaid."

Socred said...

Hi Kyunkyun:

The article about C.H. Douglas at Wikipedia is a decent article. It's mostly based upon an article written by Janet Martin-Neilsen. Her article is a good article, but there are some technical errors in terms of actual Social Credit.

Socred said...

Hi Kyunkyun:

The socialist website writes:

"This is an absurdity which arises from the conception of bank checks as money. "

This statement itself is an absurdity and based on ignorance. Even the most narrow definition of money - M1 - includes chequing accounts and money. Most transactions take place via electronic transfer of funds or cheques. A very small percentage of the money supply is cash and coin.

"M1+ (gross):
Currency outside banks plus all chequable deposits
held at chartered banks, trust and mortgage loan
companies, credit unions and caisses populaires
(excluding deposits of these institutions); plus continuity
adjustments (to “smooth” a time series when
there are structural breaks)."

http://www.bankofcanada.ca/wp-content/uploads/2010/11/canada_money_supply.pdf

I don't believe I have to comment any further on the ignorance of the article at world socialism.

Peter Olney said...

It appears to me there is much more to these issues. In early development of Australia the government provided fresh credit to build the East-West rail link. This was NOT a tax, nor was it borrowings. A similar government credit creation occured to cause the building of the Snowy Scheme. Money circulating is a part of the picture, but willingness on the part of government to build infrastructure without a charge upon the paople is another.

Eric Hollingsworth said...

Let's assume that money is created without interest. Then, it seems to me that wages plus salaries plus profits (not dividends) over a given period should equal the prices generated for that period. This is true (I think) because everything that costs something is made up of things that originally cost nothing. In other words, everything is made from natural resources. The profits made from owning rights to those resources, rather than incurring costs, should balance everything out. I'm not trying to disprove the A+B Theorem, but I wonder what you think.

Socred said...

Hi Eric:

There's far more costs which go into prices than wages + salaries + profits. An example of an income statement is below:

Net Sales
Sales
Less: Sales returns and allowances
Cost of Goods Sold
Gross Profit

Selling, General and Administrative Expenses
Salaries
Advertising expenses
Taxes and insurance
Depreciation and amortization expense
Bad debts expense
Other selling, general and administrative expenses
Operating Income (Loss)

Other Revenues and Gains
Interest income
Gain on sale of investment
Other Expenses and Losses
Interest expense
Loss on sale of equipment
Income (Loss) from Continuing Operations before Income Taxes

Income Taxes Expense
Income (Loss) from Continuing Operations

Discontinued Operations:
Gain (Loss) from operations of discontinued business segment
(Net of income tax effect of $ )
Gain (Loss) on disposal of business segment
(Net of income tax effect of $ )
Extraordinary Gain (Loss) from Early Extinguishment of Debts
(Net of income taxes effect of $ )
Net Income (Loss)

Earnings per Common Share:
Income from Continuing Operations
Discontinued Operations
Extraordinary Gain (Loss)
Net Income (Loss)



You see that there's far more expenses than wages and salaries.