Fish will not live
where the water is too clear. But if there is duckweed or something, the fish
will hide under its shadow and thrive. Thus, the people will live in tranquility
if certain matters are a bit overlooked or left unheard.
My friend and mentor Anthony
Cooney invited me to write a chapter on the A+B Theorem for the new Australian
Heritage edition of his masterpiece, "Social Credit: Economics," published
this month. The text of the chapter follows. See www.alor.org for details on the
C. H. Douglas seldom mentions
his predecessors, but there is one he mentions repeatedly, Francis Bacon. Bacon
founded the inductive method of investigation. Starting from phenomena freshly
observed, one imaginatively forms a hypothesis to account for them. The hypothesis,
if true, would predict (by deduction) other phenomena. Multiple confirming instances
reinforce the hypothesis; one counter instance eliminates it. Action based on
the hypothesis will further test it.
Unlike a mathematical theorem, the inductive
method does not provide absolute certainty based on self-evident axioms in an
abstract world. The inductive method provides abundantly reinforced hypotheses
based on observed phenomena in the real world. Douglas was a pioneer in applying
the true Baconian method to real human problems.
In regard to any application
of the inductive method, we may ask
(1) What is the phenomenon to be accounted
(2) What hypothesis is proposed?
(3) What further phenomena are predicted
by the hypothesis? and
(4) Are they confirmed?
I will here limit myself
to (1) and (2).
The phenomenon/problem that
obsessed Douglas the engineer and to whose solution he devoted his entire life
is what he calls the tragedy of human effort, the gross waste of people's labor.
Douglas quotes a statement of H. L. Gantt that the U.S. industrial system was
5% efficient.1 That means 95% waste. That would mean we were at that time working
twenty times harder than we had to to get the same results. Without committing
ourselves to particular numbers, anyone not wearing blinkers can look around and
see the same phenomenon today.
We see myriad jobs that do not actually produce
any product or service for human satisfaction; whole industries that are mere
unnecessary adjuncts to, or parasitic on, real production (or adjuncts to adjuncts);
incomprehensible legislation providing jobs for armies of lawyers and spawning
the Alice-in-Wonderland world of the civil "service"; massive labor
diverted from actual production to unproductive commercial warfare; vast resources
diverted to seducing the public; the absurdity of a country's "living on
its exports"; the crime of product destroyed to keep prices up; the heartbreak
of wonderful inventions killed in the womb; the insult of "job creation"
promoted as something desirable.
We see all the cars and roads and petroleum
used to get people to and from these unnecessary jobs. We see processing, packing,
transport, distribution, and retail processes expended to put a jar of apple-sauce
on the shelf when you could make a superior product at home by popping an apple
into the oven. All this in the context of a technological capability that the
engineer knows better than anyone could happily disemploy people. Yet despite
all this technology at our disposal and all this investment of resources, our
cities are still shamed by the specter of homeless and starving people, and even
a middle-class family is but one illness away from economic ruin. The tragedy
of human effort cries out for an explanation.
Douglas puts forward a hypothesis, which he says "has come to be called
the A+B theorem." However, it is not meant to be self-contained like a theorem
in mathematics. Taken as a whole, it is an inspired guess as to the cause of the
tragedy of human effort, subject to confirmation or rejection by observations
in the real world. It consists of three sentences, which I reproduce one by one
and have further divided into lines to assist a slow and thoughtful reading:
1. 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 organizations
for raw materials,
bank charges, and other external costs.
This premises that payments of
a "manufacturing undertaking" are either to individuals or to organizations.
To put flesh on Douglas's hypothesis and make it easy to follow, let's assume
that the manufactures in question are chairs and that the payments to individuals
are wages. B-payments cover a number of different things, but the most characteristic
and interesting of these is payments to suppliers for capital goods and services.2
So let payments to a sawmill for wood arbitrarily stand for all payments to organizations
(as if tools, etc. were free).
2. The rate of distribution of purchasing
power to individuals
is represented by A,
but since all payments go into
the rate of generation of prices cannot be less
than A plus B.
This premises that "all payments go into prices" and draws
the conclusion from the two premises that the prices of the chairs on sale at
each and every point in time ("rate") must be at least equal to the
sum of wages and payments for wood incurred on behalf of that particular batch
3. 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
which is not comprised in the description grouped under A.3
is highly condensed and is the source of all the trouble. At face-value, it says
that the employees cannot buy all the chairs - that the wages at each and every
point in time are less than the sum of wages and payments for wood incurred on
behalf of the particular batch of chairs on sale at that point in time. And it
indicates a course of action, namely, to enable the employees to buy all the chairs
by introducing "a form of purchasing-power" that does not go into prices.
The words, "A will not purchase A+B" tell us two new things. First,
they imply that A is supposed to purchase A+B and since A is money in the hands
of the consumer, we learn here for the first time that the "manufacturing
undertaking" is a consumer manufacturing undertaking. Second, since the employees
of the chair factory would not actually want to buy all the chairs, we learn here
for the first time that we are not really talking about the product of a single
"manufacturing undertaking." Rather, we are talking about all the consumer
goods and services that the nation produces. If the economy as a whole is like
the chair factory, Douglas is asking, how will individuals in the nation buy the
consumer goods and services that the nation produces?
To liken the economy
as a whole to the chair factory is to say the economy as a whole is one big consumer
production system. In this view, capital production (like the sawmill), is conceived
as merely an early stage of consumer production. The employees of the sawmill
and the employees of the chair factory are together producing chairs. The sawmill
produces wood that goes into chairs that are sold to individuals, and all costs
of production are ultimately charged to individuals, whether as taxpayers (consumers
of government) or regular consumers.
So "A will not purchase A+B"
within the context of the one company states that the employees of the chair factory
cannot buy all the chairs but in the context of both companies together states
that the employees of the sawmill and the chair factory together cannot buy all
The Big Picture
In other words, if the sawmill
and chair factory were two divisions of the same company, nothing essential would
change. At each and every point in time the price of chairs would be the same
as it was before, and the total wages available to meet that price would be the
same as it was before.
This means that "A will not purchase A+B"
is not the tautology it appears to be, because the two A's can be different. With
the sawmill and chair factory combined, the first A is the wages of all the employees
at one point in time, but the second A - the one that goes into prices - is the
wages of each division at different points in time. In that case, "A will
not purchase A+B" states something more complex than at first appears. What
it states is that the wages of all the employees at each and every point in time
are less than the wages of the chair division that went into the particular batch
of chairs on sale at that same point in time plus the wages of the sawmill division
that went into that same batch of chairs plus a payment to, say, a logging company
for the logs that went into the wood that went into that same batch of chairs.
Any company that is considered as generating prices at each and every point in
time must also be considered as generating wages at each and every point of time
(provided it still exists). If we pursue this process to its logical conclusion,
we eventually encompass the whole economy. The B-element becomes less and less,
but nothing essential changes because the A-element that goes into prices becomes
correspondingly greater and greater. The most characteristic B-payment can be
conceived as a reimbursement for past A-payments. Therefore, the A+B Theorem could
be rewritten in terms of A over time.
We can think of the economy as a whole
as a single "manufacturing undertaking" existing over time. And when
we think of its life over time, we realize that we are talking about generations.
And if we think of generations, we realize that we are talking about the entire
history of civilization. Yet our grandchildren do not make a B-payment to us,
they inherit from us. And our culture did not make a B-payment to a preceding
culture, it inherited from it. In these cases, Douglas's hypothesis still has
meaning, and we might even say this is where it really comes into its own.
A Chart That Works
Douglas's hypothesis proposes a simplified
economic model in which each stage takes its raw materials or half-made goods
from the previous stage, works them up further, and passes them on to the next
stage. We can analyze the cost of the final consumer good or service produced
as a simple addition of A-payments through its whole cost-history.
one company expends A1; the next company reimburses it (B1, equal to A1) and expends
A2; the third company reimburses it (B2, equal to B1+A2), and so on. At each stage,
A+B makes a new B; and the public makes the final reimbursement, which is just
like a final B-payment, called the price. Thus, the final price could be expressed
as A1 + A2 + A3 . . . + A100.
We can make a chart in which one dimension represents
wages received for four different stages of chair production (I've added Retail
as a separate stage) at each and every point in time and the other represents
wage-payments incurred for the same four stages on behalf of the particular batches
of goods on sale at those same points in time. Prices are got by adding across
the columns, and wages are got by adding down the columns:
that in this example, these two numbers are the same, 4A: the employees can buy
all the chairs. But Douglas asserts "A will not purchase A + B," that
is, the number got by adding down the columns is less than the number got by adding
across the columns.
Why would it be less? The chart above shows a self-liquidating
economy because wages at the logging company, wages at the sawmill, and wages
at the chair factory stayed the same over time. If they became less over time,
then the employees would not be able to buy all the chairs. For wages to become
less over time would mean that less consumer goods and services were required
as an inducement to work, either because people were disemployed or worked shorter
hours or the work became easier or pleasanter.
Now this is just what it is
the nature of labor-saving innovation to do, which is the running theme of all
of Douglas's writings. So we allow this as Douglas's silent assumption and incorporate
it into a continuation of our chart. The result is a chart of the A+B Theorem
(expressed in terms of A) that is simple and straightforward, does not involve
complex mathematics, is understandable by anyone, and really works:
(A), Price 4A|
(A), Price 4A 1|
"(A - 1)"
represents a saving of labor at the chair factory starting at T5 and a saving
of labor at the sawmill at T6. This could mean that someone is disemployed or
relieved for half the day or takes a pay cut in return for an easier or pleasanter
This simplified chart doesn't capture the cost of the innovations. But
it is obvious that at each and every point in time across the economy, the balance
must always be increasing on the side of labor saved - innovations must be coming
to more than they cost if they were not mistakes.
In addition, this chart
underestimates the real difference between labor now and labor over the cost-history
of the chairs, because the latter really goes back to the dawn of time. If it
were possible to measure the whole cost-history of the chairs, the result would
be a higher price and the need for a correspondingly bigger injection of a "form
of purchasing power" that does not go into prices.
Douglas's inspired guess, in short, is that under the influence of (1) the
accounting rule that all costs go into prices, (2) the absence of any "form
of purchasing power" that does not go into prices, and (3) innovation, the
money in people's pockets tends to become chronically insufficient to liquidate
the costs of production and that this is the cause of "the tragedy of human
The A+B Theorem is not a description of the way things are.
It is a hypothesis as to the underlying cause why things are the way they are.
Wages and prices are not usually falling over time in the real world - quite the
contrary; but a tendency of wages and prices to fall over time could explain what
we see in the real world. Similarly, money in people's pockets might not be less
than prices in the real world; yet a tendency of that to happen could explain
why things are the way they are. Douglas's hypothesis is that the economy reacts
against the situation and thus produces the phenomena that we see.
the various phenomena the hypothesis would predict and look for confirmation or
rejection in the real world would require another chapter. But to have recognized
that the A+B theorem is a hypothesis in a larger inductive investigation and to
have expressed that hypothesis correctly is much.
1. Credit-Power and Democracy, p. 16.
2. Here is a handy mnemonic device:
A is for Allowances
To buy Apples and Ale,
B is for Back-Bursements
To buy Blubber and Ball-Bearings.
3. Monopoly of Credit, p. 35f.