John Maynard Keynes by Hyman P. Minsky

Author:Hyman P. Minsky
Language: eng
Format: epub, pdf
Publisher: McGraw Hill LLC
Published: 2008-06-15T00:00:00+00:00

Diagram 4.1: Cost Curves

Profit-maximizing output of the firm is OO′. The difference between total receipts and total variable cost is the quasi-rent. In diagram 4.1, OC × OO′ is the total revenue and OA × OO′ is the total variable costs. The shaded area ACC′A′ is the quasi-rent, Keynes's q. If this firm has a debt structure, then over the period covered by the diagram, cash interest payments will be required. The interest payments are presumably independent of output; thus AVC plus interest is derived by adding total interest charges to the total variable costs. The area ABB′A′ represents the interest payments—in our interpretation, the c of Keynes. The difference between the gross quasi-rents and the interest payment is the gross profits before taxes.

If the debt contract provides for a sinking fund or includes some amortization of the principal of the debt, then the cash-payment requirements will be greater than the pure interest charge ABB′A′. Such financial considerations force the firm to use some of its gross profits before taxes to meet financial commitments. In fact if the financial contracts are sufficiently short, then the cash payments on financial contracts can exceed the total quasi-rents. The implications of this possible situation for the firm and for financial markets will be considered in what follows.

Thus q, the quasi-rent, is a cash flow that is independent of the liability structure of the producing unit. This is the concept of income used in determining the market value of the underlying physical assets. Presumably, in a perfect capital market, where uncertainty and liquidity do not affect the valuation of assets, q – c capitalized would equal the market value of equities, c capitalized would equal the market value of debts, and the sum of the two would be invariant and equal to the capitalized value of q; that is, debt structure would not affect the valuation of a firm. For purposes of valuing liquidity in a cyclical context, the cash-flow concept for a firm must allow for financing charges and tax liabilities.

Keynes recognized that the stock of liquid goods entails wastage and carrying costs. He uses wheat as his example—fully realizing that the expected appreciation of wheat prices, which is necessary if it is to be profitable to hold wheat, must be large enough to compensate for wastage, storage-facility rental, and interest on the cost of the wheat over the period wheat is carried. Certainly if one thinks of carrying stocks such as wheat, one thinks of the financing charges. But this is not explicitly mentioned in chapter 17, although the money rate of interest is used in the example (GT, p. 233) in which Keynes determines the wheat rate of interest.

Consider a pure instrumental capital, yielding a quasi-rent, q, and a pure stock of liquid goods, the ownership of which entails a carrying cost, c. For liquid-stock items, the current demand price must be sufficiently below the expected market price at the end of the carrying period so that the expected capital appreciation will more than offset the financing costs and the wastage.

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