Re: Income = Output?

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

Mill is speaking in generalities, at least I see nothing to suggest
that the axiom of equality (i.e. income = output) is indispensable for an
analytical economics.

Comment:

The Income = Output axiom is rooted in analytical considerations which
Schumpeter summarized as follows;

"...net profit cannot exist, because the value and price of the original
productive services will always absorb the value and price of the product,
even if the productive process is parcelled out among ever so many
independent firms."  (_The Theory of Economic Development_, Oxford
University Press, 1961, p. 31)

I cannot conceive of anyone thinking the matter through and concluding
otherwise.

"If in classical times [this conclusion] was not expressly stated,"
Schumpeter continued, "it is first because the older economists were not
very rigorous in recognising the consequences of their own principles, and
secondly because our conclusion appears to blatantly to contradict the
facts.  Böhm-Bawerk was indeed the first who expressly said that the whole
value of the product must in principle be divided between labor and land, if
the process of production is to proceed with ideal perfection."  (Op. cit.,
p. 31)

The realm of analytical economics - Mill's "abstract science" - is one of
such "ideal perfection".

Gunnar


----- Original Message -----
From: "Harry Veeder" <eo200@xxxxxxxxxxxxxxxxxxx>
To: "Gunnar Tómasson" <gunnar.tomasson@xxxxxxxxxxx>; "post keynesian
thought" <pkt@xxxxxxxxxxxxxxxx>
Sent: Wednesday, October 01, 2003 8:41 AM
Subject: Re: Income = Output?



>
> Harry Veeder:
>
>> I accept the pre-classical doctrine, but translating the doctrine into
>> mathematics is a delicate matter. If one embraces the doctrine, then the
>> assumption that income is equivalent to output logically implies labour
is
>> exclusively motivated by output.
>

Gunnar Tómasson:
> Comment:
>
> Indeed - and Say's Law of Markets is a logical corollary thereof.
>
> How, then, could Keynes "sympathise" with its analytical premises while
> rejecting the empirical validity of Say's Law?
>
> The answer is indicated by the following remarks by John Stuart Mill:
>
> "In the definition which we have attempted to frame of the science of
> Political Economy, we have characterized it as essentially an abstract
> science, and its method as the method a priori.  Such is undoubtedly its
> character as it has been understood and taught by all its most
distinguished
> teachers.  It reasons, and, as we contend, must necessarily reason, from
> assumptions, not from facts.  It is built upon hypotheses, strictly
analogous
> to those which, under the name of definitions, are the foundation of the
other
> abstract sciences.  Geometry presupposes an arbitrary definition of a
line,
> "that which has length but not breadth."  Just in the same manner does
> Political Economy presuppose an arbitrary definition of man, as a being
who
> invariably does that by which he may obtain the greatest amount of
> necessaries, conveniences, and luxuries, with the smallest quantity of
labour
> and physical self-denial with which they can be obtained in the existing
state
> of knowledge.  [...]  Political Economy, therefore, reasons from assumed
> premises - from premises which might be totally without foundation in
fact,
> and which are not pretended to be universally in accordance with it.  The
> conclusions of Political Economy, consequently, like those of geometry,
are
> only true, as the common phrase is, in the abstract; that is, they are
only
> true under certain suppositions, in which none but general causes - causes
> common to the whole class of cases under consideration - are taken into
> account.
>
> "This ought not to be denied by the political economist.  If he deny it,
then,
> and then only, he places himself in the wrong.  The a priori method which
is
> laid to his charge, as if his employment of it proved his whole science to
be
> worthless, is, as we shall presently show, the only method by which truth
can
> possibly be attained in any department of the social science.  All that is
> requisite is, that he be on his guard not to ascribe to conclusions which
are
> grounded upon an hypothesis a different kind of certainty from that which
> really belongs to them.  They would be true without qualification, only in
a
> case which is purely imaginary.  In proportion as the actual facts recede
from
> the hypothesis, he must allow a corresponding deviation from the strict
letter
> of his conclusion; otherwise it will be true only of things such as he has
> arbitrarily supposed, not of such things as really exist.  That which is
true
> in the abstract, is always true in the concrete with proper allowances.
When
> a certain cause really exists, and if left to itself would infallibly
produce
> a certain effect, that same effect, modified by all the other concurrent
> causes, will correctly correspond to the result really produced.
>
> "The conclusions of geometry are not strictly true of such lines, angles,
and
> figures, as human hands can construct.  But no one, therefore, contends
that
> the conclusions of geometry are of no utility, or that it would be better
to
> shut up Euclid's Elements, and content ourselves with "practice" and
> "experience."" ('On The Definition of Political Economy; And on the Method
of
> Investigation Proper to it', in Essays On Some Unsettled Questions Of
> Political Economy, Third Edition, Longmans, Green, And Co., London, 1877,
pp.
> 143-145)
>
> As noted on several earlier occasions, Mill's comments on the analytical
and
> empirical aspects of 'Political Economy' were mirrored in Keynes'
definition
> of 'The Theory of Economics'  (1922) as "an apparatus of the mind, a
technique
> of thinking" which, while not directly applicable to real-world economic
> phenomena, yet "helps its possessor to arrive at correct conclusions" with
> respect thereto.
>
> For PKTers, who do not understand or choose to dismiss the Mill-Keynes
> viewpoint, there is now this to consider:
>
> A coherent concept of Income - one that identifies it with Output - is
> possible only in the context of analytical economics.
>

Mill is speaking in generalities, at least I see nothing to suggest
that the axiom of equality (i.e. income = output) is indispensable for an
analytical economics.

However, an analytical economics may just as well begin with an axiom of
inequality. (i.e. income =/= output). However that requires that saving and
investment be treated as independent activities. I am well aware that this
possibility is difficult to discuss given that current analytical economics
is based on the axiom of equality.

Another way to proceed is as follows:

1) Output = Investment + Consumption

2) Saving = Income - Consumption
   or Consumption = Income - Saving

Consumption is crucial because it links the two equations together:

3) Output = Investment + Income - Saving


A political economics seeks to balance saving with investment
so that Output = Income.

Harry