San Diego Objectivist Study Group

Our discussion tonight of Ayn Rand’s “Is Atlas Shrugging?” (1964, CTUI pp. 150-166) went lightningly fast—too fast perhaps—in order to leave time for the out-of-the-ordinary discussion of George Reisman’s essay “Standing Keynesian GDP on Its Head.”

Before I summarize the latter, I would like to record briefly my notes to one prepared question about Rand’s position on historical indeterminism: On what basis does Rand assert historical indeterminism? (165c; see also “The Anatomy of Compromise” 147a) Is it possible to predict the future outcome of a phenomenon of nature? Is it possible to predict human action? Is it possible to predict the future of a society? The answer relies on the distinction between the natural and the artificial—what Rand calls the metaphysical versus the man-made. Human history falls under the man-made. Man-made facts need not have to come to being. This has to do with man as a volitional being. Metaphysical facts, on the other hand, are necessary facts. Thus, we can in principle predict natural phenomenon, even the weather, perhaps someday. We can predict somewhat what a man of conviction will do, but he, like an incontinent man, ultimately acts on his own free will. As to a society or an economy, well, again, as men aren’t determined, so society, a collection of them, isn’t. Hence, Rand does not predict that a society will reject socialism and embrace capitalism. It may, or not.

Anyway, our main discussion tonight was both illuminating and frustrating for the participants. It was illuminating because we were learning new economic ideas and principles. It was frustrating because the Keynesianly educated among us were strongly disagreeing with the style and substance of the essay. The main objection was over Dr. Reisman’s stated purpose of the essay, namely, to show that consumption (more specifically, domestic nongovernmental expenditure) is not the biggest form of spending in the economy.

Here below are the discussed “answers” to the prepared questions. Comments are welcome.

  I. Given CE ≡ consumption expenditure, S ≡ saving, ni ≡ net investment, gi ≡ gross investment, P ≡ profit, W ≡ wage, NI ≡ national income, GDP ≡ gross domestic product, BDA ≡ business depreciation allowance, LE ≡ living (private/personal) expenditure, GE ≡ government expenditure, DE ≡ domestic expenditure, FE ≡ foreign expenditure or net export, SR ≡ sales revenues, COGS ≡ cost of goods sold, SGA ≡ selling-general-administrative cost, PE ≡ productive expenditure, BC ≡ business costs, GNR ≡ gross national revenue, PM ≡ profit margin, MPTC ≡ marginal propensity to consume, SM ≡ spending multiplier,

And given the economic data for an imaginary economy,
DE = $11 trillion, FE = -1, BDA = 1, gi = 2, GE = 4, and PM = 9%,

1. What are the estimated GDP, NI, ni, CE, BC, PE, GNR, SR, P, W, COGS+SGA?
2. What proportion is DE to GDP? DE to GNR? CE to GDP? CE to GNR?

GDP = DE + FE + GE + gi = 11 + (-1) + 4 + 2 = $16
NI = GDP - BDA = 16 - 1 = $15
ni = gi - BDA = 2 - 1 = $1
CE = DE + FE + GE = NI - ni = 15 - 1 = $14
BC = CE x ((1 - PM) x 2) = 14 x 1.82 = $25.48
PE = BC + ni = 25.48 + 1 = $26.48
GNR = CE + PE = 14 + 26.48 = $40.48
SR = BC / (1 - PM) = $28
P = SR - BC = $2.52
W = NI - P = NI - P = 15 - 2.52 = $12.48
COGS+SGA = BC - BDA = 25.48 - 1 = $24.48

Thus, whereas under GDP accounting, domestic nongovernmental expenditure is over two-thirds of the imaginary economy, under GNR accounting, it is but a third of total spending in the economic system.

 II. If PE depends on S, what does CE primarily depend on?

Ed at the meeting offered the answer to be wage payments W. For my part, I had thought of a more philosophical answer, that CE depends primarily on human desires—on conscious wants. Both have explanative strengths. W does explain the efficient cause of CE; desires explain its final cause.

III. Given the $168 billion economic stimulus package enacted February 13, if the estimated model Keynesian consumer’s MPTC = 5/6^th,

1. What is the projected net increase to GDP in one year, according to the Keynesian economic model? Does it change this year’s GDP?
2. And if, as a recent poll suggests, two-thirds of Americans decide not to spend but to save their share of the money, what would the net increase to GDP be?
3. What is wrong with these projections, according to Reisman?

The money is new and additional to the existing money supply. It may affect next year’s nominal GDP but not this year’s real GDP. After all, it is a transfer payment. However, it does affect CE, which is a major component of GDP.

SM = 1 / (1 - MPTC) = 1 / (1/6) = 6
ΔCE = $168 x SM = 168 x 6 ≈ $1 trillion on the Keynesian model

If 2/3^rd Americans save instead of spending the money, this saving or “leakage” constrains SM, according to the text. In which case,
new MPTC = 5/6 x 1/3 = 5/18;
new SM = 18/13;
new ΔCE = 168 x 1.3846 ≈ $233 billion

All of these projections are wrong because

1. The immediate spending becomes pure “business profits” only to the front-line sellers of consumers’ goods.
2. Prices of consumers’ goods must rise due to simple inflation.
3. Costs of goods sold have to be deducted, with PM at, say, 10%, to get “profits”
4. Sellers meet the new demand by depleting their existing inventory,
5. Whose replacement is now costlier due to inflation.
6. Ultimately sellers reduce inventory and thus there is less demand and more unemployment.

 IV. If the enacted economic package were to be successful in stimulating the economy, what would have to happen en masse, according to the text?

For additional CE truly to become a stimulus to earlier stages of production, the front-line sellers of consumers’ goods must not consume the SR, and they must save it for production by completely spending it on capital goods and productive wage payments; and on and on to the next line of sellers.

But this kind of economic stimulation is not to be recommended as a policy; it promotes malinvestments.

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Helpful terms culled from the readings:

credit expansion: 1. inflation which money is then lent to business firms and individuals as though it were a supply of new and additional saved up capital funds. 2. the creation of new and additional money by the banking system and its lending out at artificially low interest rates to borrowers of low credit worthiness.
credit crunch: a simultaneous reduction in the supply of loanable funds and an increase in the demand for loanable funds.
credit contraction: a large-scale loss of capital and an increase in the demand for money holding. ????
deflation: the reduction in the quantity of money from the economic system and/or a decrease in volume of spending.
outflux: the transfer of a quantity of money away from the economic system. ()
influx: The return of a quantity of money from outside the economic system. ()
reflux: The return to active circulation of a supply of old money within the economic system—as in from under the mattresses. ()
inflation: the creation of new and additional money out of thin air into the economic system.
simple inflation: inflation for immediate spending rather than immediate lending.
productive expenditure: expenditure for the purpose of making subsequent sales—i.e., to buy capital goods and to pay productive wages.
consumption expenditure: expenditure not for the purpose of making subsequent sales, but for any other purpose—i.e., to buy consumers’ durable and perishable goods, and to pay living and government wages. (CE is subdivided into living/private/personal expenditure LE and government expenditure GE. And LE is subdivided into domestic expenditure DE and foreign expenditure or net export FE. So, CE is identical to DE + FE + GE. And under conventional, national income accounting, CE = C + I + G.)
capital goods: goods for making goods for subsequent sales: machinery, raw materials, components, supplies, lighting, heating, advertising; business inventories, plant and equipment; …
revenue/expenditure subcomponents: four subdivisions of revenue/expenditure, based on the producers’ two basic purposes:
  PE.SR ≡ sales revenues constituted by productive expenditure
  PE.W ≡ wage payments that are productive expenditures ≡ PW
  CE.SR ≡ sales revenues constituted by consumption expenditure
  CE.W ≡ wage payments that are consumption expenditures
    CE.W.LW ≡ living (private/personal) wage payments ≡ LW
    CE.W.GW ≡ government wage payments ≡ GW
gross national revenue/total expenditure: total expenditure or spending in the production of goods and services in the economic system. (SR+W = GNR = CE+PE)