PURCHASING POWER

New Zealand Listener, Volume 35, Issue 900, 2 November 1956, Page 25

PURCHASING POWER

Sir-Mr. J. Johnstone’s jibe about monetary reformers is wasted, because I wrote not a word about monetary teform. As for his arguments, only the last paragraph of his letter is sufficiently relevant to merit a reply: and that is demonstrably false. Let us consider all of the capital assets which industry puts into commission during a particular production cycle, so as to make good depreciation and to invest profits collected during the lifetime of the depreciated assets, If the average life of all capital assets is N cycles, and if the average new investment in each cycle equals the original cost of assets replaced in that cycle, then the capital expenditure in each of the following N cycles will increase by an Nth. Thus the capital expenditure will be doubled N cycles later. That is the flow of incomes distributed by investment in the Nth cycle. Now let us see what will be the flow of investment costs into prices. In respect of the assets we first considered, prices in the first cycle must be loaded with an Nth part of the cost for depre-

ciation and an Nth for investment. | Prices in the following cycle must be loaded also with two Nth parts of the expenditure in that cycle, which expenditure (as we have previously noted) has increased by an Nth. I hope a good proportion of your readers will recognise this as a time series with the variable increasing in two ways. First there is a simple arithmetical progression which, in N cycles, will aggregate twice the original expenditure, and will therefore equal the capital expenditure taking place at the same time. Secondly, there is double the depreciation on the cyclic intrease, which, by the Nth cycle, has occurred as mary times as the sum of the numbers 1 to N. Even readers who cannot grasp the second part of the series will see that whatever it adds to prices is entirely in excess of the incomes distributed by capital expenditure. I would be pleased to mail the mathematical formula to any enthusiast who cares to obtain my address from The Listener. Obviously there must be a discrepancy between consumer incomes and prices as long as any capital investment costs whatsoever are charged into prices in advance of the corresponding capital

expenditure, The existence of a large discrepancy was proved in the evidence the Government Statistician gave to the Royal Commission on monetary, banking and credit systems. When it inferred that the evidence established an equation, the Commission committed two major fallacies. In the first place, it treated the undistributed profits of industry as purchasing power in the hands of the people, Secondly, it accepted the statement that decreases in overseas assets increase monetary incomes in New Zealand, whereas the opposite point of view is postulated on page 361 of the Commission’s Report.

K.

O'BRIEN

(Hastings).