In the previous posting in this series, we observed that Keynes' basic assumptions, that new capital formation can only take place once consumption has been reduced, and that production does not equal income, violate not only common sense, but Generally Accepted Accounting Principles, or "GAAP." GAAP, contrary to what some people appear to believe, do not force individuals or businesses to conform to arbitrary rules and incomprehensible practices, but try to describe what actually happens in the microeconomic universe of a business entity and develop a set of uniform rules for the application of the principles of reality. If the people running the business are rational, they attempt to conform their internal institutions (that is, their practices and rules that dictate how business is carried out) as closely as possible to reality, that is, to GAAP.
Thus, in accordance with GAAP (and reality) a business only receives money when something the business has produced is sold, and can only participate in the creation of new money when it has something of value on which a bank or other financial institution can take a lien and issue generalized purchasing power — money — by means of which the bank and the business collaborate in transforming the specific wealth held by the business, into a generalized claim on wealth held by the bank so that what is produced can be sold, and "production" turned into "income."
Individuals and businesses can also create money between them and other individuals and businesses by direct barter exchange of commodities, goods, or services. This is how most international trade is carried on. This process is also consistent with the "Real Bills" doctrine, but we won't consider it in this discussion because we are concentrating on the role of the commercial banks and other financial institutions.
Keynesians have a problem, however, with the logical outcome of the "Real Bills" doctrine, and by far the more important part of it. Factoring inventory as described above simply makes exchanges easier by turning specific goods and services into generalized purchasing power, symbols of wealth to replace the actual wealth, which are eventually redeemed when the actual wealth is purchased and consumed, with the purchase price — revenue — used to provide the money to redeem the lien, pay the service fee, and provide income for the producer.
There is something else besides inventories that individuals and businesses have that is of value, and the value of this "something else" can be quantified and measured more or less precisely. Further, this "something else" is by far the most valuable thing that an individual or business possesses as a producer of wealth. Without it, the economic value of the individual or business is either greatly reduced or disappears altogether. In accounting, this "something else" is reflected in the "ongoing entity assumption." In financial or economic terms, this "something else" is the potential that an individual or business has to produce goods and services — wealth — in the future.
THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.
