[A]s daunting as the economic problems we now face are, acknowledging this will allow us to take advantage of the one big opportunity that this period of economic trauma has afforded: the chance to revolutionize our flawed models, and perhaps even exit from an interminable cycle of crises.1G. Ackerlof, D. Blanchard, D. Romer, J. Stiglitz, What Have We Learned? Macroeconomic Policy After the Crisis (Cambridge, MA: MIT Press, 2014), 344.
— G. Ackerlof, D. Blanchard, D. Romer, J. Stiglitz, What Have We Learned? (2014)
1.0 Wading In
Focusing a beginner’s attention on an entire economy is like throwing a non-swimmer off a wharf and hoping (they) will learn how to swim. Wouldn’t it be better to let a beginner slowly wade in one business at a time?2Bruce Anderson, “From Leeches to Economic Science,” Journal of Macrodynamic Analysis 3 (2003), 310, www.mun.ca/jmda.
We take Anderson’s suggestion seriously. And so we begin with observations about one business.
1.1 One Business: Two Types of Firm
QC Painting was a student business run by Quinn and Connor3For the purpose of confidentiality we have substituted the name Connor., over three summers (1979-1981) in Toronto, Canada.
In the months prior to their first summer in business, they started gathering together a set of tools that would be needed. A few were borrowed from relatives and family friends. But Quinn and Connor also needed specialized tools. Most of those could be purchased at a local painting supply store in Toronto. When needed, building materials were available at a local hardware store.
The floor manager at the supply store helped Quinn and Connor learn about the latest tools and supplies. He arranged for them to have a $2000 line of credit. This turned out to be crucial. QC Painting had little or no savings. Typically, however, for each contract they needed to purchase several hundred dollars’ worth of materials, in advance, weeks before payments were received from customers for completed projects.
As the number and range of expenses increased, they realized that they needed a bookkeeping system. An Assistant Manager at a local branch of the TD Bank saw the potential in what they were doing and set up a chequing account, including the use of a credit card for the business.
Even though the business was small and seasonal, transactions were numerous and diverse. To begin, they used Connor’s car as their “mobile base of operations.” They soon realized that they needed some kind of premises that would provide shelter from the weather, where they could organize and prepare materials for upcoming contracts.
They were given access to an old garage. In addition to minor structural repairs, some of the interior and exterior surfaces needed painting, and some shingles needed to be replaced. The painting crew took a week off from their regular contracts.
QC Painting had an inventory of generic exterior base coat, ‘primer.’ Such primer was needed on most jobs. Planning ahead and to save on costs, they had purchased several gallons.
When working on peoples’ homes, QC Painting was in the basic part of the economy. In working on the old garage, however, the business was in the surplus part of the economy. The garage was, of course, not someone’s home and its use by the painting business did not directly enter into the standard of living. But, renovating the garage provided premises used in order to work on homes, and it was home improvements that contributed to the standard of living. Most contracts were for working on homes, providing basic goods and services. QC Painting also got contracts with small businesses and that way contributed to the surplus part of the economy. In other words, depending on the contract, the one business operated as two types of firm, QC(1) and QC(2).4See Benton and Quinn, Part I, A Very Brief Introduction; Philip McShane, sections 3.1 and 3.2; Philip McShane, Piketty’s Plight and the Global Future, Economics for Dummies (Vancouver: Axial Publishing, 2014), “There are Two Types of Firm,” 11-14; Philip McShane, Economics for Everyone, iii-v; and CWL21, 16-17.
1.2 Describing Transactions
For a circulation of money is not a rotational movement of money. Rather it is a circular series of relationships of dependence of one rate of payment upon another. Money moves only at the instant of payment or transfer. Most of the time it is quiescent. It may be totally quiescent, as when it is held in reserve for no purpose whatever. But it may also be dynamically quiescent, held in reserve for some definite purpose.5CWL21, 254.
— Bernard Lonergan, For a New Political Economy (CWL21)
When working on a home, outlay included hourly income for the crew. It also included monies spent on maintenance and replacement of, for instance, brushes, blades, as well as car maintenance.
Homeowners paid QC Painting for completed work. Such payments were basic expenditures, ‘basic’ because they paid for basic goods and services provided in the basic part of the economy. But the business had its own basic expenditures. For instance, the business paid for paint and supplies that were used on homes.
A key is to see all of this in the productive process. Observe that for both homeowners and QC Painting, basic expenditures were transitional payments. They were transitional in the sense that they paid for transitioning materials forward in the basic level of the productive process, in each case bringing goods and services one step closer toward final sale and use6For QC Painting and their customers, we have named two types of payment: transitional and final. As observed, there were other payments such as incomes. Classes of payment will be defined in section 3.3, “Entrepreneurial Units and Classes of Payment.”. It just so happened that the homeowner was last in the line and so their final payments brought finished goods and services out of production and into their standard of living. Note that for the painting business, basic expenditures did not significantly impact their modest finances. In every contract, homeowners paid for materials. And those payments from homeowners usually were received before the next (monthly) billing cycle of their lines of credit.
When QC Painting worked on premises of businesses, there were completely similar patterns of payment. Outlay included income for employees, and monies for maintenance and replacement of tools. Again, there were also monies spent on supplies. Just as in the basic part of the economy, payments for supplies also were transitional. Where in the basic level, it was the homeowner who paid for the finished product, in business contracts, businesses paid for the finished product, namely, painted premises. In those cases, the finished product (premises for a business) were used to provide goods and services, basic, surplus, or both, depending on the business.
The various payments that we have just described can be located in the following diagram, a special case of the diagram in section 3.2 of A Very Brief Introduction.7A Very Brief Introduction, sec. 3.2.
Figure 1.1: Main payments made by QC Painting. In the figure, basic and surplus outlays are blue and purple, respectively.
1.3 Monetary Functions
1.3.1 Redistributive function
On a given afternoon, QC Painting could have plans for spending, say, $150.00 on supplies. They had a $2000.00 line of credit with the supply store. Until being called upon, monies from the line of credit were not directed to any particular purchases. That was a main reason for having a line of credit, so that purchases could be made quickly, as needs arose. They also made use of a TD credit card (another line of credit). Sometimes that credit card was used to pay off debts to the supply store. In such cases, QC Painting debts with the store were not eliminated but transferred, from the supply store to the bank. At other times, the credit card was used to cover expenses directly.
QC Painting purchased a second-hand extension ladder. A second-hand ladder was not a newly produced ladder. The effect of the purchase was to change ownership of the ladder, ownership in the sense of property law. In other words, we see the redistributive function at work.
In most of the examples just given, the redistributive function involved different businesses. But redistribution also occurred within QC Painting. Recall that prior to renovating the old garage, the business had purchased several gallons of generic white paint. Those paints were originally intended for upcoming home painting contracts. Instead of taking time out of a busy week to go to the supply store, Quinn and Connor used some of that already purchased inventory on their garage. In other words, some of the paint and supplies originally intended for QC(1) was transferred to QC(2). This change of “ownership” was not in the sense of property law. The primer paints still belonged to the one business. There was, however, a change in economic function.
1.3.2 Functional Accounting
The distinction between basic and surplus is not yet built into accounting systems. But, in the instances just described, transactions internal to QC Painting occurred and had financial implications.8See Section 2.1.1. For internal shifts in financing on a larger-scale, see, e.g., the history of IBM (International Business Machines). Through its complex history, IBM eventually moved away from producing personal computers. It now mainly provides surplus goods and services in the technology sector.
The painting business operated as two types of firm. But there was nothing to prevent Quinn and Connor from changing the intended purpose of credit or supplies from, say, basic to surplus, from surplus to basic and, generally, from juggling finances and supplies by as needed.
1.3.3 A Functional Diagram
A second diagram for QC Painting is Figure 1.2. The diagram now includes banking and lines of credit. But, the more fundamental difference is that the new diagram goes beyond preliminary description and identifies monetary functions. The diagram has convenient symbols for already described transactions: i1 is income for work in the basic level, i2 is income for work in the surplus level, m1 are monies for maintenance and more needed in basic work, m2 are monies for maintenance and more needed in surplus work, d1 are basic expenditures (monies to meet basic demand), and d2 are surplus expenditures (monies to meet surplus demand). As noted above, the notation QC(1) and QC(2) points to the fact that QC Painting operated as two types of firm9See note 4.. In Figure 1.2, there are two-way arrows linking all four main functions (basic and surplus supply and demand) with the redistributive zone. That is because, generally, monies went both ways.10For instance, using a credit card to buy supplies for a home, monies were released from their line of credit in the redistributive zone and directed to cover basic expenditures. But when paying off a debt with the bank, monies moved from the QC Painting financial capital to the bank that mainly serves the redistributive zone.
Observe that i2 monies are “cross-over” in the sense that they originate as financial capital for QC(2) (in the surplus level) but are directed to employees. And, employees used their earnings to pay for basic goods and services.
Monies m1 also are “cross-over.” QC(1) allocated some of its financial capital to maintenance and replacement. But maintenance and replacement are surplus goods and services.
1.3.4 Some Preliminary Fractions
As already mentioned, the car sometimes was used by QC Painting and sometimes for Connor’s personal use. To pay for maintenance and repair, a financial solution was needed. It was easy enough to sort out: auto-repair costs were to be shared. But, shared by whom? The costs were not shared by Quinn and Connor but by QC Painting and Connor. Part of the problem was to determine a fraction for sharing the costs for maintenance and repair. Based on expected usage by the painting business, and the intended lighter but longer-term usage by Connor, QC Painting paid for 60% of maintenance and repair while Connor paid the other 40%. The 40% was not a percentage of what Connor already contributed to the business but was from his personal savings.
A further fractioning is needed if we also advert to how the business used the car. Recall that it operated as two types of firm. About 1 in every 10 contracts was for work at the surplus level. That means that approximately 1/10th of the 60% of the automobile maintenance and repair costs was for surplus activity; and approximately 9/10ths of the 60% was for basic activity.
To track financial implications of 1/10 and 9/10 would have required feeding those fractions into spread sheets. At that time, QC Painting got by without refined accounting. However, much as water is H2O whether or not one knows chemistry, the fractioning of costs between QC(1) and QC(2) was real, and as such, hints of things to come in accounting structures in economics’ new standard model.11See sections 6.0 and 8.3.
Figure 1.2: QC Painting: five functions; two types of: income, i1 and i2; maintenance and more, m1 and m2; and expenditure d1 and d2. As noted above, QC(1) and QC(2) are for activities in basic and surplus production, respectively. Outlay of QC(1) is the sum i1 + m1; and similarly, outlay of QC(2) is i2 + m2. Basic demand is for basic goods and services. Surplus demand is for surplus goods and services. The redistributive function is for redistribution of goods, services and monies.
The focus so far has been on QC Painting. But, supply stores and banks also had basic and surplus expenditures, outlays that included incomes paid to employees, maintenance and replacement costs, capital expansion (or not), dealings with banks and other financial institutions. So, in order to more fully explore the surplus-basic structure of the economy, we need to extend the inquiry to include other businesses involved in or with the paint industry. We will get to that in Section 3, “Glimpses into the Paint Industry and Beyond.” But first, we explore a few elementary combinations of transactions between QC Painting and other businesses.
|↑1||G. Ackerlof, D. Blanchard, D. Romer, J. Stiglitz, What Have We Learned? Macroeconomic Policy After the Crisis (Cambridge, MA: MIT Press, 2014), 344.|
|↑2||Bruce Anderson, “From Leeches to Economic Science,” Journal of Macrodynamic Analysis 3 (2003), 310, www.mun.ca/jmda.|
|↑3||For the purpose of confidentiality we have substituted the name Connor.|
|↑4||See Benton and Quinn, Part I, A Very Brief Introduction; Philip McShane, sections 3.1 and 3.2; Philip McShane, Piketty’s Plight and the Global Future, Economics for Dummies (Vancouver: Axial Publishing, 2014), “There are Two Types of Firm,” 11-14; Philip McShane, Economics for Everyone, iii-v; and CWL21, 16-17.|
|↑6||For QC Painting and their customers, we have named two types of payment: transitional and final. As observed, there were other payments such as incomes. Classes of payment will be defined in section 3.3, “Entrepreneurial Units and Classes of Payment.”|
|↑7||A Very Brief Introduction, sec. 3.2.|
|↑8||See Section 2.1.1. For internal shifts in financing on a larger-scale, see, e.g., the history of IBM (International Business Machines). Through its complex history, IBM eventually moved away from producing personal computers. It now mainly provides surplus goods and services in the technology sector.|
|↑9||See note 4.|
|↑10||For instance, using a credit card to buy supplies for a home, monies were released from their line of credit in the redistributive zone and directed to cover basic expenditures. But when paying off a debt with the bank, monies moved from the QC Painting financial capital to the bank that mainly serves the redistributive zone.|
|↑11||See sections 6.0 and 8.3.|