Re: Profit versus Interest

On Wed, 05 Dec 2007 15:30:11 -0800, Lysander wrote:

On Dec 5, 12:09 pm, The Trucker <mik...@xxxxxxxxxxx> wrote:
On Wed, 05 Dec 2007 10:55:39 -0600, Mark M. wrote:

All the other "schools of economics" use the
word "profit" to describe the return to _real_ capital.

As stated before, this is not correct.

And as stated before: You are a liar. (though "all" is a bit much and
there is probably some school of econ that existed somewhere that
also tried to hide the rent inside of profits)

Furthermore even modern
economics is based on the classical dichtomy of real and nominal
variables. To economist there is only what the Trucker refers to as
real capital. There is no financial capital.

Yes. That is correct. Money is not _real_ capital. It is just money.

That is what an account
calls money and possibly credit available. To economist real variables
are not measured in money and nominal variables include prices. One
would like to be able to count units. The problem is how do you count
units when more than one things is involved. What is 2 bicycles + 2
motorcycles? There is no common unit. In practice this is often
measured in nominal terms first. So you have $10 in capital when you
add a five dollar shovel to a five dollar rake. To get real units you
divided by a price index or price deflator that measures the change in
prices to a base year. So the final is in the base year dollars. This
allows a measure of units that are not based on prices. This is what
economist refer to as a real term. Note for Macro economist and
sometimes even in micro this means the measure is still in dollars but
in base year dollars where inflation has been adjusted for.

All of this is actually OK as far as it goes. But the unit of account is
_NOT_ a factor of production; not _real_ capital. It is just a *** unit
of account ***.

What the Trucker calls real capital is what economist call capital.
Financial capital in modern economics is simply money.

WOW!!!! He gets one right but for the fact that "modern economics"
doesn't agree with what he says. The "modern economist" uses the term
"capital" to describe "financial money" inconsistently.

So what should
wikipedia say about the return to _real_ capital and about the return to
loaned money?

Most likely something convuluded and wrong. Most of Wikipedia's
articles on economics are way out in left field and dead wrong. I have
no idea who contributes these articles. Note Wikipedia is hit or miss
it all user contributed articles. ANYONE can post something and edit
something in Wikipedia. Sometimes it is good sometimes it is terrible.

Nice dodge. If it is wrong, fix it and quit whining.

This is not just economics. I have heard historians claim Wikipedia is
OK for finding out what happened on date X but never rely on any of
the analysis given to why it happened.

The overseers are pretty tough on what they call "original research" and
you have to provide references to books and the like. None of this "make
it up as you go along". A problem appears when the books disagree and in
those cases the articles get very long.

If Wikipedia were to write it correctly then, interest would be the
return to loaned money.

And believe it or not that is what it says and I raised hell about it and
tried to change it and got beat up exactly as I should have.

Profits would be the return from factors of
productions which includes capital.

And this is where you get beat up and deservedly so. Profit is the return
to _real_ capital and that is what it is and all it is in _real_
economics. You attempt to mix economics and finance.

The only way this ever gets even
slightly confusing to the uninitiated is the Solow notion of the
interest rate being a shadow price of capital. When interest is low,
capital is high. When interest is high capital is low.

In a fixed commodity money system that probably holds water just as all
the Fisher stuff also holds up somewhat. It is one of those "all else
equal" deals. Note that so far nothing has been said about capital
"flowing" over to Bimini.

The idea is the
cornerstone of convergence theory, which is bunk. That is that rich
countries, countries with a lot of capital, have low interest rates
and low return to capital. Poor countries have little capital and the
low interest in rich countries can finance high return capital in poor
countries. Capital should flow from rich to poor countries. As Bob
Lucas, Parente and Presscott, and others point out this does not
happen.

Yet it APPEARS to have happened in the case of China and India.

There are few people who stick to this theory despite the data

Wonder what "data" you are looking at.

but most understand convergence is bunk. The last paper I read that
took Convergence seriously was an early 1990's paper by Brad DeLong.
Lucas points out that capital does not flow from rich to poor
countries and hypothesizes the reason is differences in human capital.

Ya think Clinton got fooled by these 3 Republican apologists. Probably
not, but it could happen.

You can see the confusion here. Only when we claim that capital = money do
we get into trouble. The money can flow to a backwards 3rd world nation
of uneducated people and it will do no good BECAUSE it is not really
economic _capital_; not _real_ capital. But the point has validity with
_real_ capital to a lesser extent. The machinery in the hands of those
who cannot maintain it is virtually worthless. _real_ capital does not
"flow" quite so easily as "interest rates" might infer if one is simply
looking at the "discount rate".

The entire growth literature would tell us that difference in human
capital and R&D determine the differences in wealth of nations. Only
if the entire world is equaled educated and skilled and we have free
flow of technology would economies converge to each other. Convergence
to a country's own unique steady state is an entirely different
question.

From what you present above it is easy to conclude that Solow was claiming
that money is "magic" capital that can create wealth like pixie dust
sprinkled on a golden goose. And, of course, this is crap. What happens
is that labor is commanded to produce whatever those of power will choose\
wherever they choose. And money is seen as an accounting of who should be
in command. But that is not all of it. Machinery can be created in the
high tech place and moved to the low tech place. That would be a flow of
_real_ capital and the level of technical acumen to maintain is
significantly lower then that needed to create. There is also the
machinery that is used to create the machinery. And that will stay in the
high tech location. So Solow is not totally full of it.

Unfortunately, being a "modern economist", you miss most of the reality,
and focus on your pet "models". It will do little good to create an auto
factory in China because the natural resources needed to produce the
output and power the factory and the people to buy the stuff are not
proximate to China. Only in a very cheap oil world, where the cost of
transporting all this stuff is low, does this dog hunt. Location,
location, location. The real constraint of "capital flow" is the
location, the transportation costs and the security. But the fact that
money is not real capital is still correct.

Modern growth theorist would not necessiarly assume that the interest
rate is the equal to the marginal product of capital and that capital
will flow from rich to poor countries.

Well that would again depend on how you define "interest", you see. If it
is defined as the return to _real_ capital and that which is a return to
money lending is styled as "rent" then things take on a completely
different look and feel. All sorts of stuff starts falling off the model
and disintegration occurs depending on the definition (or non definition)
of the words.

The models from Jones and
Williams and my own research tend to suggest the interest rate is a
factor in investment but it is not the rental rate of capital, return
to capital.

Well make up your alleged mind: Is it the "rental rate of capital"
(inferring money) or is it the return to the ownership of machinery?
I am not telling.... I am asking. But I intend to ask everybody.
As to my own opinions: I rent a back hoe from a tool rental outfit and I
call the payment for the use of the back hoe "rent" and so does the dude
that rented me the back hoe. The reason I rented the back hoe is because
it would have taken me a lot longer to do what I needed to do had I not
rented the back hoe. The cost difference between renting it and not
renting it is a "profit" to me and it comes from the existence of the
_real_ capital called a back hoe. The guy that rented me the back hoe
receives a combination of "profit" and "wages", and he may have employees
that are paid wages. His profit is the what he has left after payments
for rent and wages and debt service on the back hoe. Yet the source of
his income is absolutely a return to the equipment he owns and rents to
me. It is "profit". Rent and wages make up the _cost_.

It is a factor but not as Solow said it was.

Nowhere in the WON will you see "interest" as anything other than a return
to loaned money and money is not considered to be a "factor of production".
Debt service on the back hoe is interest (actually a rent) and principle.

Even under Solow, the interest is equal to the return on capital not
the return on capital.

HUH! Well,,,, there ya go. Hard to be any more latter day Republican
than this. (sorta like "under Clinton" things would have been different if
they would have been different).

This stems from the idea of equalization of
returns on assets. In equilibrium all assets should have the same
return.

Where the hell is this place. I have heard of Bimini, Atlantis,
Nirvana, and all sorts of places that don't exist. They are probably
all cities in some place called "equilibrium".

Therefore interest rates should equal the return on any
particular asset. Yet they are not the same as return on capital. This
breaks down once we add risk, imperfect information, and perfect
foresight no longer holds.

Actually, you "break down" long before you get to that point.

--
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org/extend

.

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