Re: Surplus Value or Profit - Keynes on Income

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

The following passage from Keynes's letter to John Hicks dated September 8,
1936 relates to the thrust of my argument that 'Surplus Value or Profit' is
a problematic concept in the context of the analytical scheme sketched by
Keynes through Ch. 6 of the General Theory - at issue is the question
whether "the value of output", and hence "income", must be uniquely related
to the value of factor inputs or factor "income"?

I contend that the answer is YES - and see neither rhyme nor reason in
supposing the answer to be NO:

"I wish you would analyse in what way your discontent with my income concept
arises.  In my book it looks, I think, more queer and complicated than it
really is.  It is the final outcome of a greater amount of bad attempts and
destroyed drafts than any other section.  But all it comes to is really the
following: I COMMENCE WITH THE CONVICTION THAT ONE HAS IN SOME WAY TO
IDENTIFY INCOME WITH THE VALUE OF OUTPUT.  In calculating the value of
output one has to make some allowance for pre-existing capital which is used
up.  Pre-existing capital seems to be capable of being used up in one or
other of three ways, namely, (i) that part which is avoidable and depends on
decisions as to what current output is undertaken, (ii) that which is
unavoidable but is quite in accordance with expectations, and (iii) that
which is neither avoidable nor in accordance with expectations.  In defining
income I deduct the first only; in defining net income the second also;
whilst the third I do not regard as occurring on income account, but as
being a windfall loss in capital.  I do not know what alternative definition
of income you are leaning to.  But discontent with mine must arise, I think,
either out of one of the points in the above catalogue, or else out of my
manner of finally formalising the definition of what I am aiming at."

In a reply letter dated October 16, 1936 Hicks commented, inter alia, as
follows:

"Of your three definitions of income, the second and third correspond
exactly, I think, to the conceptions of Lindahl which I have been using in
my own thinking for the last couple of years" - that is (ii) or B = Income
ex ante, and (iii) or C = Income ex post.

"But your Income [(i) =] A is a different matter, and while I think I grasp
the definition, I cannot see that it is a useful concept.

"For you say that A is what the entrepreneur maximises; but since the
difference between A and B is involuntary, i.e. it is a constant for him, he
can just as well be thought of as maximising B.

"You seem to regard A as less 'ambiguous' than B.  I suppose this means less
subjective.  But is it?  Both depend upon the entrepreneur's expectations,
since the optimum maintenance (if no output is produced) will depend upon
anticipated obsolescence (for example).  User cost seems to be just as
'ambiguous' as net income.

"If I might put my whole feeling about this in the form of a suggestion;
what I should like to see happen to this part of your book is scrapping of
Income A as a concept, its place being taken by a positive investigation of
the relation between net income and output.  I feel this would be ever so
clearer."

Apparently, Keynes did not respond to Hicks' comments.

Gunnar




----- Original Message -----
From: "Bruce McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, November 27, 2001 11:36 PM
Subject: Re: Surplus Value or Profit


> On Mon, 26 Nov 2001 11:11:47 -0500, Gunnar Tómasson
> <gunnar.tomasson@xxxxxxxxxxx> wrote:
>
> >Keynes prefaced his above summary statement (3) with the following
> >paragraph:
>
> ... (long quote) ...
> "But it can only exist when, by accident or design, current
> investment provides an amount of demand just equal to the
> excess of the aggregate supply price of the output resulting
> from full employment over what the community will choose to
> spend on consumption when it is fully employed."
>
> >Here, Keynes holds it to be a condition of full-employment
> >equilibrium that D_2 be "just equal" to the difference between
> >"Aggregate Supply Price" and D_1.
>
> But this is not an equilibrium condition, it is just a
> condition for there to be full employment in the
> equilibrium.
>
> >In other words, the ONLY kind of "finance" envisaged is that
> >whereby community savings out of current income are re-cycled
> >into investment in the amount of D_2.
>
> No, this is a gross misrepresentation of the quote.  You
> are confusing finance and funding here ... in this system,
> community savings out of current income will always be
> recycled to fund the lending (this is not an open economy,
> after all), but the investment occurs first, and the saving
> occurs as a side-effect.  This is why there is only full
> employment when INVESTMENT is sufficient to full the gap
> between the Aggregate Supply Price AT FULL EMPLOYMENT and
> what will be consumed at full employment.
>
> How can you take a quote which EXPLICTLY states that it
> is sufficient investment that is a constraint, ignore the
> fact that is says that it is sufficient investment that
> is a constraint, and proceed as if it said something else.
> Note that I gave the statements in REVERSE order, and the
> statements that INCOME acts through CONSUMPTION and
> INVESTMENT is determined by INDUCEMENTS TO INVEST without
> ANY dependence on income precedes the long quote that
> you give.
>
> Now, it is true that Keynes' description is not the
> clearest possible description.  But even when relevant
> passages are pointed out to you, you persist in saying
> "in other words" and then contradicting the passage that
> you just quoted!  Its as if you started with Samuelson's
> hydraulic Keynesianism in your head, and thought that the
> General Theory was the same theory in more obscure prose,
> even as you copy out passages which make it clear that
> Samuelson's model and Keynes' are only loosely associated
> with each other.
>
>
>
> Virtually,
>
> Bruce McFarling, Shortland, NSW
> ecbm@xxxxxxxxxxxxxxxxxxx
>
>