Letter to Reagan and Friedman

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LETTER TO REAGAN AND FRIEDMAN
October 14, 1982.

In my opinion, it is the wrong economic theory indeed which plays the dominant role in the genesis of contemporary economic crisis. For this reason I pretend to offer a new economic paradigm as a theoretic basis for the new, more efficacious economic policy which could finally ensure both a harmonic, stable and rapid economic and social development, by full employment and without inflation, and the realization of social security and equity. In this article, the principal results of my research are given in brief.

In traditional economic doctrines is completely wrongly considered that the value of a commodities, per definition, is determined and regulated by one fundamental dimension only (such as by quantity of labor, or by subjective, marginal utility).

However, the value of each commodity does really have three quantitatively different fundamental dimensions: cost, utility and market-price.

It is necessary at once to warn that the relevant utility, as well as the relevant cost,

is not subjective, but objective economic category. While the subjective utility undoubtedly predestinates the behavior of consumer, the objective utility relentlessly determines the real fate of him.

In new paradigm, the economic processes as well as the value dimensions incorporated in commodities are observed and analyzed in thermodynamic manner, through concept of the economically relevant energy as a basic category of economic thermodynamics. Under the economically relevant energy is understood not only human working and vital energy but also each natural energy relevant for existence and life of man and society.

Each commodity is a container of potential utility that is being defined as a capacity (source) of economically relevant energy, installed in commodity, wherefrom a consumer can absorb this energy and thus to realize the real utility.

The production is not other but a creating of potential utility, through spending the economically relevant energy of production factors, while the consumption is a transforming of potential in real utility.

The cost is defined as the economically relevant energy spent in production of a commodity, while the real utility is done as the one absorbed and realized from consumption of same commodity.

Both spending and absorbing of economically relevant energy are being performed in frame of a determined period and intensity of production respectively consumption and even through mentioned period and intensity the fundamental dimensions of value are being measured and demonstrated (manifested) objectively.

There is no doubt that the period and intensity of production can be different (i.e. longer or shorter, stronger or feebler) than the period and intensity of consumption; thus, the economically relevant energy spent in production must not be equivalent to the one absorbed from consumption. Consequently, the cost and utility incorporated in commodity do not have to be in equilibrium at all.

The quantum of utility which is equivalent to the cost (and which exactly compensates it) is denominated as a necessary utility, and the quantum of utility which surpasses the necessary utility is denominated as a surplus of utility. Thermodynamically observed, the necessary utility represents the economically relevant energy bound for needs of simple reproduction of value (because it must compensate the costs), while the surplus of utility does a surplus of liberated energy – free both/either for expanded production (as a real producer’s surplus) and/or for activities in social superstructure and spare time (as a real consumer’s surplus). Consequently, the total utility (as the total economically relevant energy) is always composed by the necessary utility (as the bound economically relevant energy) and the surplus of utility (as the free economically relevant energy).

Of course, the costs and utilities have the monetary expressions of their own. The monetary expression of cost is represented by the monetary expense of producer for production; the monetary expression of utility is represented by the monetary income of a consumer. In accordance with the equivalence relations between costs and necessary utilities, each monetary expense of a producer, as a measure of cost, simultaneously represents the monetary income of some consumer, as a measure of necessary utility, so that the global (social) sum of the monetary expressions of individual costs must be equivalent (equal) to the global (social) sum of the monetary expressions of individual necessary utilities.

However, while, as we see, the monetary expression of individual necessary utility originally is derived from production expenditures (because it is represented by the monetary income of consumer which results from real necessary utility that is equivalent to the cost), the monetary expression of the surplus of utility, per definition, in no way can be derived from them. For monetary expressing and realizing the surplus of utility is necessary a supplemental amount of money, as a supplemental income of consumer, which, as an income of particular kind, results from real surplus of utility (but about this – more fully afterwards).

The market-price is determined through social-economic market relations between producers and consumers. According to the price-level the nominal surplus of utility is being distributed on the nominal consumer’s and producer’s surplus which ultimately determines also the distribution of real surpluses.

The cardinal thesis of elaborated economic paradigm is that the quantitative aspects of mentioned three value-dimensions exist on the level of macroeconomics too.

The global sum of individual total utilities is denominated as a Product of Civilization (because under the civilization is understood the value utilizing way), the global sum of individual costs is done as a Product of Culture (because under the culture is understood the value creating) and the global sum of market-prices as a Nominal Social Product. The Product of Civilization is composed by the Global Necessary Utility and the Global (Social) Surplus of Utility.

The monetary expression of the Product of Civilization (i.e. nominal product of civilization) is represented by the total sum of monetary receipts population which is being composed by the monetary incomes both from global necessary utility (i.e. from product of culture) and from social surplus of utility. Depending on the amount of social product, the social surplus of utility is being distributed on the global producer’s and consumer’s surplus.

The ignorance of a category of the surplus of utility is a tragic defect of economic science. Each traditional economic theory only is the one marginal case of exposed economic theory.

A particular traditional economic theory can be correct only in case when the surplus of utility is equal to zero, i.e. in case of equilibrium between utilities and costs.

Today, really, there are not the equilibrium relations between costs and utilities and, therefore, the traditional economic theory can neither explain the real economic phenomena nor recommend an adequate economic policy.

However, opposite to traditional economics, whose analytic models are the static systems of general equilibrium (analogous to the models of traditional, classical thermodynamics), the analytical model of new economic paradigm is a dynamic non-equilibrium system (analogous to the models of thermodynamics of irreversible processes) conformable to the permanent and rapid changes in the way of production and consumption, science and technology, so characteristic for modern economics. Only from such an analytic model of equilibrium dissipated but entropy diminished, such a category as the global surplus of utility can be deduced at all.

The real surplus of utility, as a part of total objective utility, also is an objective category today really present in social-economic life; it results both from progress in labor productivity (i.e. from diminishing the costs, respectively necessary utility) and from augmenting the consumption rationality (i.e. from realizing the greater quantity of total utility).

Naturally, an augmenting of social system organization (as such an allocation of labor and distribution of economic goods which lead to the minimum of costs and maximum of utilities) also contributes to the utility surplus creating. In any case, the surplus of utility is the result of diminishing the entropy both in social system organization and in individual human behavior.

With the appearance and growth of the real individual surplus of utility (which results from rationales behavior of economic subjects, for instance, from prolonging the utilization period, or from contracting the production period), the cycles of reconsumption (as a measure and function of utility) becomes longer than the cycles of reproduction (which is the function of cost), the frequency of demand becomes lesser than the frequency of supply, demand lesser than supply, and therefore one part of material social production cannot be realized, what causes the goods in stock, underutilization of capacities, unemployment, etc. This part of the real social product, as a material substratum of the potential social surplus of utility, can be realized (i.e. transformed in real social surplus of utility) only through such a kind and quantum of additional money which exactly represents the monetary expression of the real social surplus of utility.

Since a source of the surplus of utility is not a productive labor directly, but a growth in economic rationality, as a kind of labor-saving, without renunciation of a consumption, in social-economic life, the monetary expression of the surplus of utility is being expressed not by credit but by non-credit money.

Today, however, all money in circulation is a kind of credit money. The credit money, of course, is conformable to the traditional, one-dimensional concept of value, but it cannot express the monetary aspect of the surplus of utility.

The shortage of non-credit money provokes the problem of deflation that is the most profound cause of contemporary economic crisis. Surely, even endless expansion of modern credit money cannot eliminate the existing problem of deflation. Only the adequate emission of non-credit money, exactly conformable to the real amount of the nominal social surplus of utility, can compensate the mentioned problem of deflation. The existing endless expansion of credit money, only, inevitable, generates inflation, not solving the fundamental problem of deflation.

Considering that only through satisfying the human needs (for social security, education, health, etc.), the surplus of utility can be absorbed and realized, in order to represent the monetary expression of it, the emission of non-credit money must be used for financing determined social services. In such a way a corresponding part of contribution and taxes for these services (equal to the monetary equivalent of the social surplus of utility) is being annulled.

This is not absurdity. This is economic law. It is indeed possible to finance the maintenance of unproductive part of population in monetary way and without taxation of economy at least in part, i.e. in accordance with the real amount of the social surplus of utility. Based and built on material social production, a modern social superstructure is being composed both by activities and processes (services) which represent the social system existence costs (as an administration, army, etc.) and therefore must be financed through fiscal duties included in production costs, and by services which represent a realization of the social surplus of utility and therefore must be financed not through duties but through emission of non-credit money that, per definition, cannot be included in production costs.

The present fiscal financing of this latter services (which, in fact, are a social superstructure of particular kind) represents the tragically error of modern, orthodox economic theory and policy. Because of mentioned unnecessary, absurd duties, which, as all duties, are incorporated in prices, the surplus of utility is annulled in artificial manner (i.e. through book-keeping) so that while the consumers must pay the maximal price (equal to utility), the producers may earn only the minimal one (equal to cost), what, naturally, diminishes both consumption and production. However, if these duties were annulled, the consumers would pay the price reduced for amount of consumer’s surplus, while the producers would get the one increased for the amount of producer’s surplus, which would lead to extending both consumption and production. That way all partakers in economic life could be in profit.

Thus, it is totally clearly that because of economic theory and policy which do not take into consideration the existence of the surplus of utility, in modern economy, instead of a source of progress and welfare, the real surplus of utility becomes the source of insoluble contradictions and confusions in social and economic life, in fact, the main cause of economic crisis.

On one hand, as the economic system founded (organized and led) on the principles of traditional economic doctrines can function normally only on condition that the surplus of utility is equal to zero, inevitable, such a system must spontaneously generate the forces and behaviors characteristic for the so-called consumer’s civilization which, by diminishing the period and intensity of commodity utilization, destroy the surplus of utility.

On the other hand, considering that there is not a progress without surplus of utility, the very same economic system inevitable creates the elementary mechanisms of the non-credit way of money emission through which at least a part of the potential social surplus of utility of given society is expressed and realized spontaneously.

As the realization of income from the social surplus of utility demands the sum of incomes (alias the sum of utilities) to be greater than the sum of costs, all such elementary mechanisms must be based upon deficit in national accounts, e.g. in order to realize the social surplus of utility, the public expenditures, as the sum of consumers incomes, must be greater than the public takings which, as the components of prices, represent the sum of costs. Consequently, the budget deficit as well as the national and foreign debt are nothing else but such elementary mechanisms in which the emission of non-credit money is disguised in fact.

Of course, as the temporary or periodical social surplus of utility demands the temporary or periodical deficit, the permanent surplus does the permanent one. Hence appears the necessity for policy of permanent deficit.

However, it must be born in mind that the deficit in national accounts must not be directly obvious from existing nominal ciphers every time. Even more, there is no doubt that in terms of inflation the very same economic accounts (including the global national accounts) not only may but even must be in real non-equilibrium just at nominal equilibrium.

Of course, only the real economic sizes can be relevant for objective research. In truth, while the real economic laws are being realized by real sizes exclusively, it is only the pretended pomp of theoretical dogmas which is manifested by nominal ones. About the exposed theory are numerous instances. The analysis shows:

- that through the central-bank credit to state for financing public expenditures, a part of real duties (taxes and contribution) is being annulled in fact (viz. because of inflation rate and coming-late of the budget-takings behind the public expenditures, the real expenses always are greater than the real takings, so that just nominal equilibrium in budget conceals a real deficit in it);

- that at crediting the commercial banks (enterprises and population), in terms of inflation, a part of real debt is not paid off by the debtors also when the nominal one is done in whole;

- that by enormous inflation, even real interest rate can be negative, etc., etc., which all indicates that a determined amount of nominally credit money, as a really non-credit money, is given free indeed, and that, consequently, the social surplus of utility, respectively the net emission of non-credit money, does exist in truth. As we see, contemporary inflation plays the essential role in functioning the mentioned elementary mechanisms of spontaneous monetary expressing the social surplus of utility.

It is, then, totally clearly that the non-equilibrium of national accounts (as an expression of the existence of the social surplus of utility) is objective economic law, regularity which is being realized at any rate – either according to a plan (with the help of consciously organized emission of non-credit money, including both an adequate institutional framework and effective instruments necessary for leading the economic policy), or, as today, spontaneously and chaotically, through inflation of credit money, budget deficit, national and foreign debt, asynchronies of taking and expenditures and other chaotic economic processes

For this reason, without provocation of entire stagnation in economic development, i.e. with the total annulling the social surplus of utility, none modern government that leads a traditional economic policy, can eliminate the existing inflation and budgetary deficit.

On the other hand, for same reason, but on the basis of new economic paradigm, the solution for inflation problem, and the way out from economic crisis, can be very simple.

As the realization of the surplus of utility is condition sine qua non for normal modern social reproduction, it is only necessary to legalize the institution of income from emission of non-credit money. This is feasible at once and by simple scenario.

By decree of parliament, the necessary amount of non-credit money should be emitted in the form of cash that is being distributed (directly from account of central-bank) to the unproductive part of population only (such as pensioners, invalids, children, schoolboys, students, artists, scientists, housewife, etc.).

By selling their products to these primary porters of non-credit money, the businessmen will gain the money amount necessary for reproduction, without paying the interests and absurd fiscal duties. Finally, a part of primary non-credit money will finish in hands of producers as a producer’s surplus (i.e. extra accumulation for expanded reproduction), while the other will rest in hands of consumers as a consumer’s surplus.

It is also evident that the prices could not rise if the central-bank emitted the exactly necessary amount of non-credit money.

Consequently, if the social surplus of utility already exists really, the legalization of it becomes a cardinal institutional prerequisite for building the optimal economic order, conformable to the development level and rhythm attained by modern culture and civilization, production and consumption way. It is not too much to say that without inaugurating the emission of non-credit money there are no chances for overcoming both national and world economic crisis.

Also, there is the World Surplus of Utility (which results from international trade that distributes the commodities according to the utility maximum, and instigates the production according to the costs minimum). The monetary equivalent of the world surplus of utility must be distributed (as the world non-credit money, from account of the world-bank and by decree of International Monetary Fund) to the poor states, i.e. developing countries (because these, respectively their population have the dissatisfied needs and therefore can realize an additional quantum of utility). With the world non-credit money the developing countries will cover the expenses of their additional import, aiding, in this manner, the export expansion of developed industrial countries. If the world surplus of utility thus exists,. all states of the world can be in profit at the same time.

Today, a part of monetary equivalent of the world surplus of utility is spontaneously expressed (emitted) through world inflation and world crediting system. Because of world inflation, a part of foreign credits the poor countries really return not, i.e. win it as a donation, in fact as a real world non-credit money.

The policy as well as the science must accept these facts. The present non-credit monetary chaos must be modified (transformed) in the non-credit monetary organization. Growing difficulties in functioning modern economies demand an urgent action for legalizing the mechanism of monetary expressing the social surplus of utility.

It is absolutely evident that the more the social surplus of utility there is in a given society, the better are the conditions for solving the economic and social problems. In offered paradigm, the distribution “according to needs” appears not only as an ethical principle but just as an economic law, the fundamental condition for normal reproduction of each economy and society in which the social surplus of utility is being generated legally.

To my thinking, it is the theory of the surplus of utility which is the only adequate theoretical basis for constructing the new, both national and world, economic order.

Yours respectfully
Stojan Nenadović
22000 Sremska Mitrovica

Srenska Mitrovica Borisa Kidriča 19
October 14, 1982 Yugoslavia

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January 19, 2009 · Stojan · No Comments
Posted in: 10. Letter to Reagan and Friedman