Sunday, 18 January 2015

Erroneous Economic Assumptions

The following is a list of what I believe are erroneous economic assumptions.  While the list is not meant to be exhaustive, these assumptions lead to erroneous conclusions.

1) The labour theory of value
2) The quantity theory of money
3) Say's law
4) Neutrality of money
5) Factors of production are only land, labour and capital
6) Man's needs and wants are insatiable
7) There's no such thing as a free lunch
8) Money is a commodity that acts as a medium of exchange
9) Real costs are opportunity costs


Anonymous said...

Well, I certainly disagree with the fact that social credit isn't inflationary, not because of prices but only because of increases in the money supply. This concept is explained in the next two articles with very clarifying examples from a professor of the Austrian School of Economics. I really don't think there's a lot of weak points to refute in this two austrian articles but maybe some of it's contents could be proved wrong from a social credit viewpoint. I don't know a lot about the social credit doctrine so maybe there could be a rejoinder in relation to this articles:
I think that Say's law is irrefutable, on the grounds that it constitutes a basic principle in the dynamic performance of any economic system, especially one that is based in a truly free market system. Here's an article on Say's law from a binary economic's perspective:
Also, could you please elucidate what did you mean when you made reference to "the neutrality of money"? Thank you so much, I await your kind response.

Socred said...

Hi Anon:
If prices don't rise, then there is no inflation. Inflation is the rise in prices over time. If prices are falling, then my income purchases more goods and services. The money supply is continuously increasing over time. I read the articles that you gave links to. Those who follow the Austrian school of economics believe that money is “gold” or “paper” or ….. some other physical commodity, when in fact the vast majority of money is, and always has been credit. Credit is created by banks through loans to businesses and individuals, or payment of interest on deposits and payment of ordinary business expenses. Bank created credit is simply numbers in a bank account and are merely debit and credit entries. I refer you to Alfred Mitchell Innes’ “What is Money”.

Say’s law is based upon the belief that prices can always adjust to changes in effective demand. This is not true. The upper limit of price is probably government by the “laws” of supply and demand, but the lower limit is governed by the rules of cost accounting. Firms have a standard set of rules that they must follow (GAAP in North America) which determine a firm’s profitability and access to credit (money). Capitalized costs are “sunk” or “fixed” and any firm cannot operate where revenues are less than expenses for any length of time. If effective demand is insufficient, firms go bankrupt. Effective demand, or income, is distributed by firms through the media of wages, salaries and dividends. Douglas, while working as a cost accountant in a factory at Farnborough discovered that the factory always generated more costs than it distributed in income over a given period of time. After testing this hypothesis over 100 firms, he found this to be true for every firm except those heading for bankruptcy. He concluded that this must be true for every firm, which implies that it’s true in totality. In other words, total costs generated in a given week in the economy are always greater than total incomes generated in the same week. People are not given enough income to buy back what they produce. Say’s “law”, when tested against reality, is demonstrated to be false.

Take care.

Anonymous said...

Thank you for the information provided it's been very helpful.

Best regards.