Saturday, May 28, 2011

The Money Myth (with Franz Hoermann)

This and next week's posts will bring the two preceding, tedious entries on double entry bookkeeping and accountancy into focus. Professor Hoermann has the deconstruction of economics generally in his sights, and, since his assertion that economics is pure propaganda is bold (to put it mildly), not putting any meat to the bones of such a claim would of course be unacceptable. I will be translating large sections of his book The End of Money, from the chapter “Der Mythos vom Geld” ("The Myth of Money”) in the belief that the core supporting planks of economic theory regarding value and price discovery are thereby destroyed. Since reading Steve Keen's “Debunking Economics” I've had little time for mainstream economics, but am excited again by what it might be since acquainting myself with Hoermann's work (he goes far further than Keen). What economics might be I shall begin exploring, as usual via Prof. Hoermann, in three weeks time.

And now over to the professor's meat:

So-called values

In modern economic life we don't calculate with money at all. The numerical values, which, in accountancy results, are accompanied by currency symbols, do not represent money at all (money as legal tender, notes and coins). In economics one calculates with so-called values. But what these values actually are and how they differ from legal tender, or how and when they transform themselves into legal tender, is consistently concealed. And no one looks into this, since he who seriously asks such questions is branded either as ignorant or revolutionary. If we want to understand the actual problems of the global economic system, we must first enter the twilight world of these supposed values. Thereafter the countless deceptions and deceits, used to bamboozle people in the real economy, will become much clearer and easier to penetrate.

Exchange value and utility value

One of the oldest classifications of value serves to distinguish between exchange and utility value. Exchange value is an estimation of a market price. As such it is theoretically verifiable, since a later sale at this or another price can function as a comparative measure. The utility value on the other hand can't be measured in money at all. Here things like sentimental value, collector's value, or uniqueness play a role. Because with objects which are used but never sold no market price can be established, their utility value must remain purely subjective, and can neither be objectively verified nor compared to other estimated values.

In this light we'd like to present a little thought experiment. A piece of jewelery costs 70€. A medicine mortally needed by a person allergic to bee stings costs exactly the same. So, even though the price is the same, what can we actually say about the value of the two very different objects? Isn't a medicine capable of saving lives worth far more than a simple piece of jewelery? Not in every case. For those not allergic to bee stings this medicine has absolutely no (utility) value. For them the piece of jewelery will most likely have the higher value.

This example makes very clear that with utility value we are dealing with a complex, multidimensional phenomenon, which cannot be measured at all on a unidimensional, linear scale. Utility value arises from many conditions, often unknowable in advance, such as the body's state of health, access to information, intention, skill, and much else besides. It is therefore only subjectively assessable and can never be measured on a simple, linear scale, nor determined or even approached by means of the cash flow's verifiable price. If we compare the prices of these two objects—medicine and jewelery—all we are comparing is 70€ with 70€. The objects lying behind these prices and their defining qualities are each unique and therefore incomparable. The finding is clear: The exchange value arises out of the highly personal and purely subjective utility value. Exchange value can in fact never be scientifically or verifiably measured in advance (Latin: ex ante). Empirically—that is, in practice—only actually paid prices are provable in hindsight (Latin: ex post).

It clearly follows from these musings that a practicable, predictable exchange value cannot exist at all. At best we can guess a figure for the later market price. For this reason we suggest in future not to use the term “exchange value” at all, to avoid confusion. In future we should talk only of the market price (ex post) or of the guessed price (ex ante). Distinguishing an “exchange value” from a guessed price is scientifically impossible; such can, therefore, not exist. It's just an empty expression. It causes continual confusion in the field of economics, and leads all too easily to manipulation and deceit. Utility value, on the other hand, enters the scene when an object is used, not when it is sold. And of course there exists no scientific method for calculating it.

For example, imagine a machine churning out products that are then sold on the market. The sales produce income in the form of revenues. What proportion of those revenues should we assign to the machine? What proportion should be assigned to the staff operating the machine? What about the raw materials? And the building housing the machine, the land on which the building stands?

All these questions are not scientifically verifiable. Sir Karl Popper would speak here of the absence of falsifiability, that is, the impossibility that other scientists can refute the assignment of future cash flow to individual assets. The assignment of revenues to individual components of some activity such as the production of a good happens arbitrarily. Every possible theory for explaining this process can be supported by some arguments, but attacked by others. Therefore theories of value can never be falsifiable nor part of any empirical science.

This situation resembles, quite shockingly, that of medieval theologians hotly debating how many angels could stand on the head of a pin. Viewed through the lens of today's scientific theory the answer is as clear as day: Because no claim on this matter can be falsified the question itself cannot be said to be scientific. Exactly the same finding applies to accountancy valuation. Bookkeeping and accountancy were discovered in medieval times. Modern scientific theory has never been applied to these antique business methodologies. Were such to happen, the absence of falsifiability would require the immediate discontinuation of their use, to avoid confusion and abuse. For those who recognize this it is no wonder that we see endless reports of financial scandals and their corresponding trials flooding the press. After such events some new law is enacted or an old one tweaked to avoid similar future occurrences. The USA's Sarbanes-Oxley act, for example, was a consequence of the ENRON scandal. Nevertheless a short time thereafter the same sort of thing happened again, which led to another change in the law, which again could not change anything. Insiders know full well that all these “reforms” are, in truth, utterly ineffective, indeed must be so, because the core problem, the hopelessly outdated and today even damaging double bookkeeping method, is upheld. Only double entry bookkeeping and the accountancy that arises out of it enable the financial elites to perpetuate their medieval shell game, to confuse population and politics alike with their manipulatable, meaningless numbers.

When this secret knowledge—that accountancy is not an empirical science but a medieval art form similar to the above mentioned theological debate about angels—becomes broadly known, then the interrelationships of the financial world and the wider economy will be clear to population and politician alike. Obviously theological discussion is important and necessary, and we have no intention here of devaluing it. But its methodology is simply not suited to running an economy, since its claims and counterclaims are always vague and therefore manipulatable. Small groups of insiders can twist the interpretation of the various meanings to their own unfair advantage as they please.

We fear that genuine, foundational reforms, precisely for this reason, have remained underground and fringe all this time. This core reason, the unscientific nature, and high susceptibility to manipulation, of bookkeeping and accountancy, leads like an arrow directly to political lobbying, which is nothing more than targeted manipulation of commercial and other law in the interest of minority social groups. The damaging belief in bookkeeping and accountancy will be with us for as long as students in schools and colleges are taught by rote the rules of accounting processes and legal texts. Learning by rote is of course not learning in an academic sense, in the sense of mentally free education. It is far more a mental manipulation tool of a narrow minded religion, repressing its flock for centuries. Those who are trained by rote learning have no way of recognizing the deeper context of the subject at hand. A deep belief is burned into them, without their active awareness and often against their wills. This process is called brain washing by psychology.”

Toby again. I want to wrap this up with a couple of paragraphs from Steve Keen's “Debunking Economics” discussing supply and demand as it effects price determination in firms generally:

“Economic theory argues that productivity falls as output rises, so that higher levels of output result in higher prices. The 'supply curve' therefore slopes upwards: a higher price has to be offered to entice firms to produce a higher output.

Though this sounds intuitively plausible, when this theory was put to those who do know how factories are designed and managed, they rejected it as “the product of the itching imaginations of uninformed and inexperienced arm-chair theorizers” (Lee 1998, citing Tucker).”

If only it were so innocent. The truth is that economics must produce these laughable, totally abstract and disconnected theories to prevent science and the general public from entering their temple and shining the light of impartial and scientific inquiry where it's not welcome. Profits, elitism, monopoly, lobbying, class divisions, rich and poor, the whole nine yards, depend upon it. Economics is indeed The High Priesthood, and the best ever created to boot, since even economists don't know it.

Saturday, May 21, 2011

Oh no! Numerical Expenses and Cash Flow 101 (with Franz Hoermann)

My prog rock days taught me the stadium call of, “The professor on the drum kit!” (Geddy Lee summoning a Niel Peart drum solo.) My call to my smaller stadium: “The professor on the book kit!” Watch that logic fly! No paradiddles, no triplets, no flams, but there is one “net income neutral balance sheet contraction” in there, and, if we're lucky, there'll be a lot of amour. Sorry, I mean amortization. Over to you, Professor Hoermann:

“Let's say an energy supplier runs an atomic power plant, and that it cost 1000 money-units (MU) to build. The energy supplier assumes that he'll be running the plant for 25 years. Half of the plant was financed via a bank loan. The personnel costs of running the plant are 30 MU per year, and at the start of the project there's 50 MU cash available. These details yield the following start-up balance:

Net assets (or equity) consist here of half the power plant plus the cash position. Now let's assume the interest rate of the loan is 5% per year, and that the term is 25 years. The energy supplier earns from his tariffs a yearly revenue of 120 MU. His profit and loss account would look, at the end of the first year, like this:

The startup costs of the long term capital are spread out, via amortization, over the plant's economic life, and booked as expenditure, that is, as negatively impacting profits. The basic idea here is that, at the end of the plant's economic life, there should be enough money saved up to buy a new plant of exactly the same quality/price. Expenditure decreases profit, so it also decreases the tax-burden profits bring with them, as well as the dividend owed. 1000 MU / 25 years = 40 MU. For the 500 MU of the bank loan 5% interest is due (500 x 0.05 = 25 MU). The loan is likewise amortized over 25 years, thus; amortization equals 500 / 25 years = 20 MU. The amortization simultaneously decreases the debts on the liability side and the cash account on the asset side, which is why it's termed a “net income neutral balance sheet contraction,” [I hope I got that vaguely right!] because, with amortization, neither expense nor gain accrues. Repayment of the loan itself does not decrease profits, only payment of the interest does. Personnel costs must of course be paid in cash, since the workers need money to pay their bills and go shopping with. Wages also become earnings from the company's customers, which are likewise paid in cash.

The result of all this is a balance sheet profit of 25 MU, whereas the cash flow shows 45 MU. The calculation of profit can be established with 't-account'-presented (ledger) profit and loss accounting:

The deductions are listed as expenditure in the profit and loss accounts, even though they do not correspond with any [ongoing] disbursements. Their function is a purely numerical allocation of investment costs over the lifespan of the atomic power plant. Correspondingly, received cash earnings will not be taxed to that extent, since earnings are 'opposed' by these numerical deductions, an 'opposition' which reduces profits by that amount. This amount (40 MU) is also not due to the share holders, because profits are reduced by the deductions. The difference between earnings and expenses (in this example: revenue – personnel costs – deductions – interest) yields a profit of 25 MU. This profit is then relevant both to tax and dividend owed. But of more importance for the survival of the company is the actual cash flow. This is calculated in our example thus: revenue – personnel costs – interest – amortization = 45 MU.

Deductions are not cash entities, they are a pure numerical expense, and are therefore not payments. On the other hand loan amortization [loan repayment], while not an [accounting] expense, must nevertheless be paid out of the company's cash registers, and therefore negatively impacts cash flow. When all's said and done we get the following balance account:

The power plant was deducted by one year (1000 MU – 40 MU = 960 MU). Cash reserves have increased by the amount of the cash flow (20 MU + 45 MU = 65 MU), bank debt was amortized by one cycle (500 MU – 25 MU = 480 MU). Net assets increased by the year's profit (520 MU + 25 MU = 545 MU). And since each business event must be booked twice to be correctly calculated, we see again equal asset and liability totals in the balance sheet.

Companies must estimate their prices in such a way, in this case the price of the electricity supplied, to enable them to earn a profit. Even in this simple example, however, it's clear to see that the process of establishing price must consider something else: keeping cash flow healthy! Let's finally have a look at the balance sheet of this energy supplier at the end of the power plant's economic life, that is, in year 26. The loan is completely paid back, the power plant completely deducted, and all other data we'll assume unchanged. The following profit and loss account emerges:

Against the claim against the debtor (Claim K) is a bank liability of its assets of the same amount (Liability K). The balance total rose by the amount of the loan, of which one says, the balance extended itself by the amount of the credit.”

(Toby again.) The final paragraph is key and was extremely difficult to translate (and I don't know what “Claim K” and “Liability K” refer to). Furthermore, I have here translated an explanatory section without translating the passages it illuminates. In that light perhaps my thoughts on all this might be helpful...

In conjunction with double entry bookkeeping, in conjunction with the Central Bankers' explanation of money creation procedures (numerically booked debt is the bank 'asset' which 'backs' the created giro credit (money)), in contrast to market-based price discovery (supply and demand determining price as if by magic in the organic hubbub of 'transparent' buying and selling), and in glaring contrast to the impossible conditions of Perfect Competition, what Hoermann is here exposing is the old fashioned and humdrum, messy and guessed way in which price is set on the supply side, as well as how profits are both calculated and reported. And above we have seen the only simplest basics. I can barely imagine the tricks and chicanery Guru Accountants are capable of.

In sum, what we have here are the actual mechanics, which are deliberately counterintuitive and abstruse, of money creation and accountancy—accountancy being the discipline which tells us about profit and loss—all of which bears precious little resemblance to orthodox economics' fairy tale, The Myth of Free Markets. Hence the measuring of value via money/the price system is not only doomed by the relativity and subjectivity of value itself, but also inherently flawed and unscientific systemically. 'Out there' is a mess of the powerful maintaining their power with all manner of shenanigans, in a socioeconomic system which forces Perpetual Growth on the economic activity of one of planet earth's animals, even though the planet has finite resources.

Go figure.

Saturday, May 14, 2011

Oh Wow! Double Entry Bookkeeping 101 (with Franz Hoermann!)

(Lovingly translated [with notes and explanatory emphases] into English by me. Sorry, this isn't exciting, but it is important to understand this stuff as part of transcending it. Personally, I find accountancy cruelly counter-intuitive. If I've made any jargon-errors (very possible), please flag them for me. A quick note; a “debit” is an “asset” and a “credit” is a “liability.”)

“There are many reasons why double entry bookkeeping is called “double.” One is visible in the fact that each sum of money is recorded twice, once as the value of an actual object and once as a representation of its origin. These entries have been written down since the Middle Ages as doubled “billing points,” called accounts, on the left side “Debit,” with “Credit” on the right. Should a businessman found a company with 1000 Euro in its account, it would be recorded like this:

The debit side of the Cash Account lists each asset which is physically present and assessable, here it's simple bank notes. The Cash Account is an active balance sheet account, which means its end result (accounting balance) is displayed under the left column (active side). Active balance sheet accounts show assessable assets (e.g. cash, stock like goods and raw materials, machines, buildings, land, but also patents, licenses and other rights), and represent their money value. Thus the value of the debit side increases, while it decreases on the credit side. Should 200 Euro be taken from cash assets [a decrease], it must be recorded on the credit side of the Cash Account, and is therefore booked under Credit.

With the Proprietary Account on the other hand, we are dealing with a passive balance sheet account. That is, its end result is displayed under the right column (passive side). These accounts list the assets' origins as 'legal initiations.' The so-called “debts” recorded here account for credit capital. Assets 'given' to the company by its owner are hence recorded under the Proprietary Account, since they represent the owner's legal claims.

On the other hand, money borrowed by the owner from a bank would indeed be listed on the left, under Debit in the Cash Account, but recorded under Credit in the bank liabilities account [an entry type under Proprietary Account?]. These numbers denote, then, that a liability (debt) against a bank exists to such and such a degree. So, were we to produce a balance of our company after the deposit of 1000 Euro, it would look like this:

Since the amount is recorded doubled, the Balance balances (assets tally exactly with liabilities).

And now we can discern the historical thinking behind double entry bookkeeping: it was an antique system for the safe recording and management of data. The doubled entering and totaling was supposed to ensure that no omission or human error corrupted the information, but in the days of electronic databases we need no longer be reliant on such primitive security systems. The money amount itself finds itself only on the asset side (of the Cash Account). The liability side only tells us to whom the legal claims on the assets would accrue – here the owner. So, if the owner buys a machine for, say, 800 Euro, this yields the following booking: Machine Account (Credit) on the Cash Account: 800 Euro. In the accounts:

Because the machine was purchased for cash and the cash position thereby decreased by the sale amount (here 800 Euro), the booking is effected on the credit side of the Cash Account as an inventory decrease, whereas the Machine Account records it under Debit as an inventory increase. But this yields no changes on the asset side of the balance sheet, since both the cash – which thereafter belongs not to the businessman but the seller of the machine – and also the machine it bought, both legally belong to the businessman, thus the Proprietary Account remains at 1000 Euro. [This is poorly written in the German I feel. The cash that belongs to the machine salesman is exactly not the remaining cash that belongs to the business owner. But in the weird world of accounting, who knows!] Since in this case only entries on the asset side are affected (the Machine Account increases whereas the Cash Account decreases, we call this an “asset swap.”

After the cash purchase the balance sheet looks like this:

So we can see that whatever happens to the real assets is recorded only on the asset side. The liability side is only affected when profits or losses are registered, or when changes in legal relationships occur.”

(In following weeks I'll translate subsequent sections that, together with this 'basics' passage, should demonstrate how double entry bookkeeping, value, banking and 'free' market economics operate together, as a cohesive system, to perpetuate the hierarchically organized fleecing of the poor by the rich.)

Saturday, May 7, 2011

The Alchemists

The Alchemists

route through to drowsy compliance. Cut
a groove that hugs you tight. Narcotic

cocoons charm all eyes closed, colour
their lids with everything you could dream

you want. You know you want it all. Nothing
that sunny can be bad. Yes the positive

is woven everywhere. Yes they take our stuffing
and make it gold. Yes we are they. Those shapes?

They’re ships for everyone, journeying
to the ever-distant port they summon from mists,

from clouds of desire, from the dark
of our memory. A lulling of echoed chants

directs the drummed beat, the slumbering lung,
the rhythm of waves. Permit no discord.

Allocate rapture.