[W]hat is needed is a more fundamental rethinking of the design of our financial system and of our framework for macroeconomic policy.1G. Akerlof, D. Blanchard, D. Romer, J. Stiglitz, What Have We Learned? Macroeconomic Policy After the Crisis (Cambridge, MA: MIT Press, 2014), 333.
— G. Akerlof, D. Blanchard, D. Romer, J. Stiglitz, What Have We Learned? (2014)
For this section, we look to particular cases referred to by Figure 2.1.2See also figure in A Very Brief Introduction, sec. 3.2. As mentioned in the Preface, readers might want to first glance through these examples and return later to work out details.
Figure 2.1: Five functions; two types of: income, i1 and i2; maintenance and more, m1 and m2; and expenditure d1 and d2.
2.1 Renovating a Garage for Business
Working on the garage afforded a convenient time to do an inventory of tools. Revenue for basic work was zero, as were basic expenditures and basic income. The crew, however, did receive $1000 of income from QC Painting. The cost of the primer taken from the inventory originally purchased for QC(1) was $100.00. A few roofing tools were purchased for $70.00; and, for one day’s use, a paint sprayer was rented for $95.00.
The $1000 in wages was for surplus activity, so i2 = $1000.
The $100 was a surplus expenditure. That was a final purchase of paints, removed from production for application to the garage, a garage that was a surplus good for the business.
Renting a sprayer for a day cost $95.00. The paint sprayer had already been manufactured and sold into the economy. How is rental of the sprayer explained in terms of economic functions? Two common types of renting are: one-time payments and rent-to-own. For this example, we suppose that the rental company owned the sprayer outright.3In some cases, rental companies buy tools through long-term financing. Analysis would require knowing financial structure and ledgers of the rental company. But, unless rented out, the sprayer sat dormant, a finished product purchased from the productive process, owned by the rental company, but not used. For a one-time rental fee of $95.00, QC Painting got to use the sprayer for a day. Using it to paint the garage, they paid the rental company for its use in the surplus level. The sprayer and tools were paid for by using a credit card.
For QC Painting, buying roofing tools for the garage was a capital expenditure. Remember that about 1/10 of their contracts were for surplus activities while about 9/10 were for working on homes. The $70 outlay for purchasing roofing tools therefore fractioned: for use in surplus production, we have (1/10)($70) = $7; and for use in basic production, (9/10)($70) = $63.
Figure 2.2: During the week of painting the garage. Letters are ordered to indicate direction of payments. For instance, ‘S1R’ means payments from QC(1) (QC Painting in basic supply mode) to the redistributive function.
2.2 Transactions with Another Business
In this example, we look to some key transactions between QC Painting and a shoe store. As already mentioned4See section 1.3.4., the shoe store was providing everyday footwear. And so, in painting the shoe store premises, the painting business was providing surplus goods and services. For the present discussion, we ignore other costs such as electricity, water, rent for the premises, cost of gas for the car, and taxes. We also suppose that, during that week, the shoe store did not purchase new inventory.
The job took six days to complete. Income paid to QC Painting employees was $1200. No monies were spent on either maintenance or replacement of tools. There was, however, a cost of $250 for buying paint and supplies. The painting business charged the shoe store $2000.
Employee income, i2(QC) = $1200, whereas i1 (QC) = $0. QC Painting was providing surplus goods and services, which means that d1(QC) = $0. The painting business did not direct any monies to maintenance and more. Therefore, m1(QC) = $0 and m2(QC) = $0. Their expenditures were surplus, for paints and supplies, with d2(QC) = $250. To cover those surplus expenditures, QC Painting drew on their line of credit, hence RD2 = $250.
For the shoe store, we suppose the following dollar amounts:
Two sales clerk positions each provided an hourly wage of $7/hour; 8 hours per day; for six days. The manager received an hourly wage of $10/hour; 8 hours per day; for six days. The shoe store sold (average) 30 pairs of shoes per day, at an (average) price of $40 per pair, for six days. Selling those shoes met basic demand. Customers’ payments for shoes were final5See sections 1.2, “QC Painting: Describing Transactions” and 3.3, “Entrepreneurial Units and Classes of Payment.” payments in the sense that, by being purchased, shoes were removed from production and, in the case of leisure shoes, entered the standard of living.
Salaries to sales clerks at the shoe store together with salary to the floor manager give i1(shoe store) = $1152. For d1 (customers), we compute: (30 pairs sold per day) x ($40/pair) x (6 days) = $7200. For monies directed to maintenance of the premises we get m1(shoe store) = $2000. The shoe store was providing only basic goods and services, so i2(shoe store) = $0.
If payments are aggregated according to payment types, we get the following:
Figure 2.3: QC Painting and the shoe store. S1 = basic supply, D1 = basic demand; S2 = surplus supply and D2 = surplus demand. Blue arrows represent monies for the surplus economy.
|↑1||G. Akerlof, D. Blanchard, D. Romer, J. Stiglitz, What Have We Learned? Macroeconomic Policy After the Crisis (Cambridge, MA: MIT Press, 2014), 333.|
|↑2||See also figure in A Very Brief Introduction, sec. 3.2.|
|↑3||In some cases, rental companies buy tools through long-term financing. Analysis would require knowing financial structure and ledgers of the rental company.|
|↑4||See section 1.3.4.|
|↑5||See sections 1.2, “QC Painting: Describing Transactions” and 3.3, “Entrepreneurial Units and Classes of Payment.”|