Thursday, January 28, 2010

Rules of Inventory

When I started this blog, I sought a way to evaluate the investment value of a dollar independent of foreign currencies. I sought a way to gauge its purchasing power within the U.S. economy. I proposed the value of a dollar is the inventory of all things for sale divided by money supply, where the money supply is the sum of printed cash and credit. So V = I/(P+C). Back then, it was intended that the inventory was more or less a constant—things for sale would remain stable on average—so, by the formula, if printed currency stays the same and credit collapses, the value of a dollar increases.

Shifting variables around, I saw that I had just equated money supply with inventory. I called this the "cash-inventory equivalency," which is an assumption upon which this blog is based, but a relationship I find nowhere else in economics. The closest thing is the quantity theory of money which relates money supply to prices, but doesn't equate them.

Anyway, while the U.S. money supply is easy to estimate, how to approach the calculation of inventory—the total price of all things for sale—has been on my mind. So over the past couple weeks I wrote a series of posts [a-e] that discusses different ways marketable goods are exchanged, which collectively add up to the longest post on this blog. Here is the system:

Inventory can be:
1. Purchased outright: the price of each item for sale is added to the inventory, or...
2. Used over time, as in:
a. rentals: the cost to buy the rented item is added.
b. labor: labor is excluded from inventory, or...
3. Made to order, as in:
a. services: services are weighted by the sales of stock shares of the company that provides them (or whole establishments if privately owned, when and if it is for sale).
b. goods: treated as the sum of raw materials plus the service that assembles them, or...
4. Null inventory: giving away money or trading money for money is excluded.

1. Regular Inventory. These are items sitting on store shelves or in stockpiles awaiting purchase. Cars, houses, loaves of bread, barrels of oil, copper bars, etc. these items, that are for sale, are added together to determine their weight on the inventory.

2a. Rentals: for houses, cars, and anything else, their contribution to inventory each time they change hands is the price it would take to buy them. One can use "reverse rents" [a,c] to approximate the price to buy. The logic being, the owner bought them, and renting resembles buying from the owner, with the owner acting as the financing organization [b].

2b. Labor: is not included in the inventory. First, labor itself does not have any value, only what it produces. So might the laborer have inventory value? I looked at this from the perspective of an employer buying a slave [a], or an independent contractor selling himself [d]. If a worker generates savings, possibly there is value as an investment [c], but since ownership of a person is not a legal option, there is no way to factor it in to the inventory.

3a. Services on demand: for services provided by an individual, for the same reason labor is excluded, so are services from independent contractors. At the business level, companies can be bought and sold, so have an inventory value as a function of their profit when they are for sale. The inventory value of all the services they provide is reflected in that sales price. If a service company is owned by stock holders, the value of its services is reflected in the price of shares for sale. Shares of stock, those on the market, are added to the inventory at their asking price.

3b. Goods produced on demand: follows the same logic as services on demand, where the service is assembling raw materials into a finished product. The raw materials are tallied in the inventory as regular commodities. The service that assembles them has an inventory value as a function of its profitability, when the company is up for sale, or as its shares are bought and sold. If an individual contractor assembles the goods, the service is not added to the inventory, in line with the labor not being a commodity.

4. Null Inventory: There are many things that have value and are bought and sold but not part of the inventory, and labor is one of them. Any gift of money, or trading money—anything that involves an exchange of money for money—is not included [e]. This includes bond sales and securities, loans of any sort, gambling, taxes, charitable contributions, derivatives, and insurance premiums.

In summary: sales are divided into goods and services. Goods are added to the inventory at their price to buy, whether they are offered for sale or rent. Services are not part of inventory, but a company that provides services, can be sold as a good. Individuals that provide services cannot be sold. Money is not a good.

Illegal goods have to be factored in line with these rules. Prostitution, for example, behaves as a service provided by an independent contractor, so is not tallied in the inventory. Prices of illicit substances, however, must be counted.

As data is tallied, these are the rules by which inventory will be calculated. The following posts discuss my train of thought in more detail.

a. Mortgages, Reverse Rents, and Ghost Slaves.
b. Implied Prices.
c. High Maintenance.
d. Made to Order.
e. Null Inventory.

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