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The A+B Theorem Explained

The Gap Between Purchasing Power and Prices

William Waite

on 30 October 2015

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Transcript of The A+B Theorem Explained

There are two sides to the real economy

Production: Where products are made
Consumption: Where products are sold
There are also two sides to the financial economy (money system) that correspond to the physical economy.

Production: Where prices are made

Consumption: Where prices (total production costs) are canceled

Products are made by taking raw materials and changing them into things somehow useful to people. Each change requires the input of energy or effort that generates cost. This system is called the production system.


Finished products are made available to people for purchase for a price. We'll call this the consumption system.
Any input during the production of a product generates a cost. This cost takes the form of a financial number that is attached to the product.
What is Cost?

The cost of production is calculated by adding up all of the costs that have been attached to the product on its journey through the production system. The basis for price is the cost of production.
What is Price?

Price is the money number the consumer must pay to access the product made available by the production system. The basis of price is total cost of production. It cannot be less than cost if the producer is to receive sufficient money to continue producing.

The purchasing of a product in the distribution system cancels the price, sending money back to the production system via the retailer.
What is the Problem?
"A factory or other productive organisation has, besides its economic function as a producer of goods, a financial aspect - it may be regarded on the one hand as a device for the distribution of purchasing power to individuals, through the media of wages, salaries and dividends; and on the other hand as a manufactory of prices - financial values."
Douglas' evidence before the MacMillan Committee on Finance and Banking, 1930

Key Question
: Does the production system distribute sufficient purchasing power to consumers to pay prices?

Bank Charges
Tools and
Tax and
Total Production Costs
Millions of Peaches

The costs of a canning factory
Bank Charges
20c p/t
$1 per tin (p/t)
5c p/t
50c p/t
2c p/t
1c p/t
30c p/t
Cost of tin $2.18

30c of purchasing power made available to cancel $2.18 in generated costs

Farmers Profit
Cost of 1 can's worth of peaches $1.00
65c purchasing power made available to cancel $1 in generated costs
Industrial Peaches
The Douglas Diagnosis:
"In any manufacturing undertaking the payments made may be divided into two groups:

Group A: Payments made to individuals as wages, salaries and dividends

Group B: Payments made to other organisations for raw materials, bank charges, and other external costs.

The rate of distribution of purchasing power to individuals is represented by A, but since all payments go into prices, the rate of generation of prices cannot be less than A plus B. Since A will not purchase A plus B, a proportion of the product at least equivalent to B must be distributed by a form of purchasing power which is not comprised in the description grouped under A."
C.H. Douglas, The Monopoly of Credit, p. 35

And the cure:

"As we have previously noticed, individuals in the modern world obtain their purchasing power through three sources - wages, salaries and dividends. This purchasing power is taken away from them through the medium of what we call prices, and it will be quite obvious to you that the first thing necessary is to make total purchasing power equal to total prices, a proposition which has no other known solution than by the addition of a credit issue to purchasing power. WE MUST GIVE THE CONSUMER PURCHASING POWER WHICH DOES NOT APPEAR IN PRICES."

C.H. Douglas, The Control and Distribution of Production, p. 8
10c p/t
A Worsening Problem

This is essentially a problem that has arisen as a result of industrial manufacturing methods. As production stages for any given product become more numerous and complex and lead times (the time from when the product begins to be manufactured to the time it is available to the consumer) increase, the gap between prices and purchasing power widens. This occurs because production systems in industrial economies tend to become more capital intensive for longer periods of time per unit of production.

Also, as machines increasingly replace humans in the production system there is proportionally less money being made available to labour/consumers to cancel prices relative to production costs.

Behind each icon above lies industrial processes that are generating prices more quickly than they are paying people to be able to meet them.
Is there a Gap Between Purchasing Power and Prices?

C.H. Douglas
Wages, salaries and dividends (purchasing power) earned in the production system enable people to access goods in the consumption system
Compare the cost accountancy system of pre-industrial production with that of the industrial period
Saved seed
Owner labour and
basic tools
Composted material
from farm
% of yield as rent
Surplus sold at market as 'profit' is indistinguishable from charges for labour
Because the producer has no real money costs for production there is no gap that arises between production costs and money paid to labour available for cancelling those costs.
Pre-industrial Peaches
You will notice from the diagrams above that in modern industry the accumulation of costs in the production system

occur at a greater rate

than incomes are distributed by the same system to cancel those costs in the consumer market. Hence the gap.
Costs of a can's worth of peaches in an industrial economy
The A+B Theorem Explained
There are few if any monetary costs in this system. All money received from sales goes to paying labour
Full transcript