Capital concept in national accounting

["Per Gunnar Berglund" <pgb@xxxxxxxxxxxxxxxxxx>]

This is in reply to Paul Altesman (I thought the heading needed revision!)

To me, this query started when I realised how Keynes wriggled to avoid the
awkward capital definition issue in "The General Theory". Keynes used only
money values of income and expenditure, the only volume measure he used was
that of employment.

Keynes defines that volume concept in chapter 4 ("The Choice of Units") of
The General Theory :

"For, in so far as different grades and kinds of labour and salaried
assistance enjoy a more or less fixed relative remuneration, the quantity
of employment can be sufficiently defined for our purpose by taking an
hour's employment of ordinary labour as our unit and weighting an hour's
employment of special labour in proportion to its remuneration; i.e. an
hour of special labour remunerated at double ordinary rates will count as
two units. We shall call the unit in which the quantity of employment is
measured the labour-unit; and the money-wage of the labour unit we shall
call the wage-unit. Thus, if E is the wages (and salaries) bill, W the
wage-unit, and N the quantity of employment, E = N * W ."

It seems to me that Keynes had a volume index in mind, and that it would me
more correct -- considering today's normal use of the terms -- to speak
about the "volume of employment" when referring to Keynes's weighted sum of
quantities of various kinds of labour.

It is astonishing how little attention that has been paid to this
fundamental definition in Keynesian economics. After all -- the whole of
Keynes's General Theory was aimed at explaining how the volume of
employment is determined. Considering this, the definition and measurement
of the explicatum must be of utmost importance.

I was happy to see that Randall Wray took up this point in his excellent
PKT seminar paper "Keynes's two theories of value" (
http://csf.colorado.edu/pkt/wray/pktsem5.txt   ). I was not entirely happy
with his discussion, however. The crucial point of the definition seems to
be the adjective "ordinary (labour)". This could be taken to denote an
average-wage working hour at any particular point in time. But such a
denotation would block any intertemporal comparisons, thus making the
employment concept practically useless. The reason for this, of course, is
that 1897 ordinary labour is completely different from 1997 ordinary labour
-- the composition of employment changes year by year, which renders the
mere averaging useless for comparisons over (longer periods of) time.

This problem is certainly not unique to emploment measurement. Any
measurement of volume indices must take into account the 'structural'
changes in composition of the 'basket' over time (mind this is very much
what the Boskin CPI report is about). This is usually resolved by
re-weighting and chaining indices at regular intervals. The development of
the volume of the 'average' working-hour (or the 'average' consumption good
or whatever) may be referred to as the "quality drift" factor.

Now, in the end the quality drift of employment boils down to the
philosophical question of what should be meant by "homogenous labour". An
extreme position on this matter (which I am prone to take) is that labour
is not homogenous if it makes use of different equipment. To exemplify: An
excavator operator using a small Caterpillar is not equivalent to a
excavator operator using a huge Caterpillar -- the two make up different
kinds of labour. With this drastic view taken, the difference between the
kind of production activity performed and the kind of labour performing it
vanishes. There is but activity, the neoclassical black box "economic
machine" transforming input to output is abolished.

Personally, I believe this scrapping of the "production function" black box
by denying the "economic machine" as a figure of mind, may be a way of
building a consistent economic set of definitions to support
non-neoclassical economic theory.

Feedback wanted on this!


Per Gunnar Berglund
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