WEBVTT NOTE 27. "The National Income Approach" 1 00:00:00.000 --> 00:00:10.000 Chapter 27 The National Income Approach 2 00:00:10.000 --> 00:00:16.560 No analysis of Keynesian economics would be complete without at least some discussion of 3 00:00:16.560 --> 00:00:25.980 what is variously called aggregative economics, macroeconomics and the national income approach. 4 00:00:25.980 --> 00:00:32.060 Many of his disciples are under the impression that it was Keynes who created the national 5 00:00:32.060 --> 00:00:34.540 income concept. 6 00:00:34.540 --> 00:00:37.580 This is pure fantasy. 7 00:00:37.580 --> 00:00:42.620 Efforts to calculate the national income have a long history. 8 00:00:42.620 --> 00:00:48.980 Though Keynes does have a great deal to say about aggregative economics, which we have 9 00:00:48.980 --> 00:01:15.540 The National Income Approach owes at least part of its present vogue to Keynesian ways 10 00:01:15.540 --> 00:01:37.900 Is National Income Determinant? 11 00:01:37.900 --> 00:01:43.700 The first thing to be emphasized about the national income is that it is an arbitrary 12 00:01:43.700 --> 00:01:50.100 and from the standpoint of scientific precision an indeterminate figure. 13 00:01:50.100 --> 00:01:54.540 The ablest students of the subject have recognized this. 14 00:01:54.540 --> 00:02:01.380 I need merely refer to the fine pioneering study of Simon Kuznets. 15 00:02:01.380 --> 00:02:08.860 Kuznets devotes his entire first chapter of fifty-seven pages to a discussion of the problems 16 00:02:08.860 --> 00:02:22.340 The Statistician who supposes that he can make a purely objective estimate of national 17 00:02:22.340 --> 00:02:30.100 income, not influenced by preconceptions concerning the facts, is deluding himself, for whenever 18 00:02:30.100 --> 00:02:37.020 he includes one item or excludes another, he is implicitly accepting some standard of 19 00:02:37.020 --> 00:02:54.180 Kuznets goes on to show that estimates of the national income necessarily involve legal 20 00:02:54.180 --> 00:02:57.220 and moral considerations. 21 00:02:57.220 --> 00:03:04.780 Should we include the compensation of robbers, murderers, drug peddlers and smugglers? 22 00:03:04.780 --> 00:03:12.140 And how shall we draw a line between economic activity and economic goods on the one hand, 23 00:03:12.140 --> 00:03:18.840 and active life in general and its stream of satisfactions on the other? 24 00:03:18.840 --> 00:03:27.800 Should washing, shaving and playing for amusement on the piano be treated as economic activity? 25 00:03:27.800 --> 00:03:34.380 When judged by the attributes of satisfaction yielding scarcity and disposability, they 26 00:03:34.380 --> 00:03:40.260 They do not differ from the same activities carried on for money as services to other 27 00:03:40.260 --> 00:03:46.020 people—nursing, barbering and giving concerts. 28 00:03:46.020 --> 00:03:53.100 And yet Kuznets decides to include only items that are dealt in on the market. 29 00:03:53.100 --> 00:04:01.340 This of course excludes all do-it-yourself activities, which in total are probably enormous. 30 00:04:01.340 --> 00:04:09.260 It excludes all the products of the family economy, including all the activities of housewives. 31 00:04:09.260 --> 00:04:13.260 So we get to such paradoxes as these. 32 00:04:13.260 --> 00:04:19.420 When a man marries his cook, the value of her work disappears from the national income 33 00:04:19.420 --> 00:04:21.260 accounts. 34 00:04:21.260 --> 00:04:26.860 When an opera singer sings professionally, she is considered as adding the equivalent 35 00:04:26.860 --> 00:04:30.460 of her salary to the national income. 36 00:04:30.460 --> 00:04:36.260 When she sings for charity or for friends, it doesn't count. 37 00:04:36.260 --> 00:04:41.020 How are we to prevent double counting at a hundred points? 38 00:04:41.020 --> 00:04:47.620 If we count the income of doctors and dentists, should we or should we not deduct it from 39 00:04:47.620 --> 00:04:50.860 the income of patients? 40 00:04:50.860 --> 00:04:55.420 What is it that we are trying to measure anyway? 41 00:04:55.420 --> 00:05:02.180 What is the difference between economic activity and active life in general? 42 00:05:02.180 --> 00:05:10.180 How, except by arbitrary value judgments, do we distinguish between productive and unproductive 43 00:05:10.180 --> 00:05:11.860 activities? 44 00:05:11.860 --> 00:05:19.240 Are we trying to measure national income produced, national income paid out, national income 45 00:05:19.240 --> 00:05:24.300 spent or national income consumed? 46 00:05:24.300 --> 00:05:31.780 No doubt today, most laymen and a large number of statisticians and economists assume that 47 00:05:31.780 --> 00:05:38.580 all these problems must have been satisfactorily solved because they read daily in their newspapers 48 00:05:38.580 --> 00:05:45.500 official figures showing exactly what the national income, personal income, disposable 49 00:05:45.500 --> 00:05:53.460 personal income, and above all, the gross national product, or GNP, were not only in 50 00:05:53.460 --> 00:05:59.060 and Past Periods, but at what annual rate they are currently running. 51 00:05:59.060 --> 00:06:04.620 And these figures are presented with great precision, with decimal points. 52 00:06:04.620 --> 00:06:10.300 Few laymen are aware that these figures are made up, not of definite items which can be 53 00:06:10.300 --> 00:06:17.100 lined up and counted, but in large part of estimates subject to error. 54 00:06:17.100 --> 00:06:21.640 Let us take a few quite recent illustrations. 55 00:06:21.640 --> 00:06:29.280 The President's Annual Economic Report of January 1958 boasted in its opening paragraph 56 00:06:29.280 --> 00:06:39.880 that the nation's GNP, or Output of Goods and Services, in 1957 totaled $434 billion, 57 00:06:39.880 --> 00:06:44.160 five percent larger than in the preceding year. 58 00:06:44.160 --> 00:06:50.200 Only later in the report were we explicitly told that four-fifths of this increase was 59 00:06:50.200 --> 00:06:56.300 was accounted for by rising prices, and that therefore, in physical terms, the increase 60 00:06:56.300 --> 00:07:00.100 was only about 1%. 61 00:07:00.100 --> 00:07:08.160 In July of 1958, however, the National Income Estimates received one of their periodic revisions, 62 00:07:08.160 --> 00:07:17.160 and the Department of Commerce Statisticians decided that our GNP in 1957 was not $434 63 00:07:17.160 --> 00:07:45.600 This brings us to one of the great problems 64 00:07:45.600 --> 00:07:54.320 in Estimating National Income. It is measured in a dollar which has itself no fixed value. 65 00:07:54.320 --> 00:08:03.320 In a period of inflation, all values are falsified. Today, the most frequently cited overall figure 66 00:08:03.320 --> 00:08:11.880 is not that of national income, but of gross national product, or GNP. I shall therefore 67 00:08:11.880 --> 00:08:16.240 used this for purposes of illustration. 68 00:08:16.240 --> 00:08:23.800 For 1939, the GNP was estimated at $91.1 billion. 69 00:08:23.800 --> 00:08:31.600 For 1957, it was estimated at $440.3 billion. 70 00:08:31.600 --> 00:08:37.400 Here is an apparent quadrupling, or better, of the GNP. 71 00:08:37.400 --> 00:08:43.560 But when the government statisticians restate the figures in constant dollars, specifically 72 00:08:43.560 --> 00:08:54.920 in 1954 dollars, they find that the GNP in 1939 has to be raised to 189.3 billion dollars, 73 00:08:54.920 --> 00:09:02.120 and that the 1957 GNP has to be lowered to 407 billion dollars. 74 00:09:02.120 --> 00:09:11.080 In other words, real GNP did not quadruple, but only about doubled in the 18-year period. 75 00:09:11.080 --> 00:09:17.860 The government statisticians get this result by dividing actual dollar amounts by an index 76 00:09:17.860 --> 00:09:21.160 number of prices for each year. 77 00:09:21.160 --> 00:09:28.120 They print, in fact, a separate table of implicit price deflators for the gross national product 78 00:09:28.120 --> 00:09:35.820 figures for each year based on an index number of 100 for 1954. 79 00:09:35.820 --> 00:09:47.120 The price deflator for 1939 on this basis is 48.1 and for 1957 is 108.2. 80 00:09:47.120 --> 00:09:54.620 If we take the GNP in 1939 at the prices that prevailed in that year, it comes, as we have 81 00:09:54.620 --> 00:09:59.660 have seen to $91.1 billion. 82 00:09:59.660 --> 00:10:11.180 But if we translate 1957 national income into 1939 prices, we get, instead of $440.3 billion, 83 00:10:11.180 --> 00:10:18.820 only $195.7 billion for 1957. 84 00:10:18.820 --> 00:10:22.580 This does not look nearly as impressive. 85 00:10:22.580 --> 00:10:30.420 If again we divide these figures by the population, we find a much lower rate of per capita growth 86 00:10:30.420 --> 00:10:36.400 than we are at all likely to gather from the crude overall figures. 87 00:10:36.400 --> 00:10:42.780 But though inflation and the changing value of the dollar make comparative overall national 88 00:10:42.780 --> 00:10:50.520 income figures quite misleading, is it, in fact, possible to correct the comparison by 89 00:10:50.520 --> 00:10:54.960 Applying Implicit Price Deflators? 90 00:10:54.960 --> 00:10:59.160 Only Approximately, Never Accurately. 91 00:10:59.160 --> 00:11:06.300 As Kuznets and every other serious student of index numbers has pointed out, goods never 92 00:11:06.300 --> 00:11:13.700 remain the same for two years in succession either in relative quantities or in comparative 93 00:11:13.700 --> 00:11:20.520 of Quality, and no index number can be completely scientific. 94 00:11:20.520 --> 00:11:27.900 There is one further factor that distorts and falsifies comparative national income figures. 95 00:11:27.900 --> 00:11:35.140 It is a factor I do not recall ever having seen discussed in connection with these figures. 96 00:11:35.140 --> 00:11:40.700 Yet it goes to the heart of the whole problem of measurability. 97 00:11:40.700 --> 00:11:48.780 Major crops often have a smaller total dollar value than smaller crops, hence crop restriction 98 00:11:48.780 --> 00:11:55.740 schemes, but this merely illustrates a wider principle. 99 00:11:55.740 --> 00:12:02.060 Economists have pointed out since the time of Adam Smith that it is not value in use 100 00:12:02.060 --> 00:12:09.060 but scarcity that determines value in exchange or money price. 101 00:12:09.060 --> 00:12:16.300 Water is an indispensable commodity that ordinarily commands no price at all. 102 00:12:16.300 --> 00:12:23.140 If more and more things became plentiful, except dollars, the national income, as measured 103 00:12:23.140 --> 00:12:26.880 in dollars, might begin to fall. 104 00:12:26.880 --> 00:12:33.920 If we could imagine a situation in which everything we could wish for was in as adequate supply 105 00:12:33.920 --> 00:12:41.500 as Air and Water, we might have no monetary national income at all. 106 00:12:41.500 --> 00:12:48.420 When one seeks to be clear about basic principles, it is never a bad idea, in spite of the ridicule 107 00:12:48.420 --> 00:12:56.880 that has been heaped upon it since the days of Karl Marx, to go back to Crusoe economics. 108 00:12:56.880 --> 00:13:03.960 Suppose then, we begin with a community of just two persons, one of whom raises beans, 109 00:13:03.960 --> 00:13:12.440 say one thousand pounds, and the other of whom raises potatoes, also one thousand pounds. 110 00:13:12.440 --> 00:13:15.180 This is their total wealth. 111 00:13:15.180 --> 00:13:21.660 The total wealth, or, if we wish, income of the community, is thus one thousand pounds 112 00:13:21.660 --> 00:13:26.440 of beans plus one thousand pounds of potatoes. 113 00:13:26.440 --> 00:13:33.920 But someone may wish to know which is the wealthier, Ben, who raises beans, or Peter, 114 00:13:33.920 --> 00:13:41.720 who raises potatoes, and what is the total wealth or annual income of the community expressed 115 00:13:41.720 --> 00:13:45.640 in terms of some common measure. 116 00:13:45.640 --> 00:13:52.860 Suppose Ben and Peter exchange their beans and potatoes at a ratio of a pound for a pound, 117 00:13:52.860 --> 00:13:59.140 to such an extent as to bring the relative marginal utilities of each to both of them 118 00:13:59.140 --> 00:14:01.780 into equilibrium. 119 00:14:01.780 --> 00:14:08.780 And suppose we elect to regard the potatoes as the medium of exchange and the money of 120 00:14:08.780 --> 00:14:10.580 account. 121 00:14:10.580 --> 00:14:18.100 Then the total income of the community is obviously 2,000 pounds of potatoes made up 122 00:14:18.100 --> 00:14:25.020 Up of one thousand pounds of potatoes and one thousand pounds of beans a year. 123 00:14:25.020 --> 00:14:29.300 But now, certain paradoxical results appear. 124 00:14:29.300 --> 00:14:36.020 Suppose Peter doubles the amount of potatoes he grows, while Ben raises only the same amount 125 00:14:36.020 --> 00:14:37.340 of beans. 126 00:14:37.340 --> 00:14:45.420 Then, the income of the community has risen, in real terms, to two thousand pounds of potatoes 127 00:14:45.420 --> 00:14:51.940 plus one thousand pounds of beans. We might be tempted to conclude that, in terms of the 128 00:14:51.940 --> 00:14:58.500 common standard of value, the income of the community was now three thousand pounds of 129 00:14:58.500 --> 00:15:07.500 potatoes. But because potatoes were now twice as plentiful and beans were unchanged in supply, 130 00:15:07.500 --> 00:15:14.020 Ben might demand, and Peter might be willing to pay, two pounds of potatoes for every pound 131 00:15:14.020 --> 00:15:15.700 of Beans. 132 00:15:15.700 --> 00:15:22.180 But this would mean that the supply of beans was twice as valuable as before. 133 00:15:22.180 --> 00:15:29.780 Therefore, the total income of the community, as expressed in potatoes, would not be 3,000 134 00:15:29.780 --> 00:15:34.900 pounds of potatoes, but 4,000. 135 00:15:34.900 --> 00:15:40.380 Suppose on the other hand it was the supply of beans that had doubled, and Peter was able 136 00:15:40.380 --> 00:15:47.380 is capable to demand and get two pounds of beans for every pound of potatoes. 137 00:15:47.380 --> 00:15:56.380 Then the income of the community measured in pounds of potatoes would not be three thousand pounds but only two thousand. 138 00:15:56.380 --> 00:16:04.380 So our national income figure expressed in a common medium of exchange or money of account 139 00:16:04.380 --> 00:16:12.520 does not express any absolute total at all, but merely an internal relationship of marginal 140 00:16:12.520 --> 00:16:15.780 values times quantities. 141 00:16:15.780 --> 00:16:22.580 We could go on to illustrate this by a more complex model, assuming, say, a hundred different 142 00:16:22.580 --> 00:16:28.580 commodities, one of which would be gold, and assuming that a certain weight of gold, a 143 00:16:28.580 --> 00:16:36.580 A dollar or one thirty-fifth of an ounce was the medium of exchange and the money of account. 144 00:16:36.580 --> 00:16:42.980 It would then be easy to show that an increase in the other ninety-nine commodities would 145 00:16:42.980 --> 00:16:50.380 by no means mean a proportionate increase in the national income as measured in dollars, 146 00:16:50.380 --> 00:16:57.100 and yet that a doubling of the amount of dollars alone might double the national income as 147 00:16:57.100 --> 00:16:59.900 as expressed in dollars. 148 00:16:59.900 --> 00:17:06.700 Nor would it be possible to correct for these paradoxical results, except in an inaccurate 149 00:17:06.700 --> 00:17:14.420 and untrustworthy fashion, by using implicit price deflators or inflators. 150 00:17:14.420 --> 00:17:21.740 And if the real problem of translating money value income into real or heterogeneous physical 151 00:17:21.740 --> 00:17:28.880 income is insoluble, still more so is the problem of translating either into psychic 152 00:17:28.880 --> 00:17:37.080 or enjoyment income, hence the impossibility of a scientific comparison of the income of 153 00:17:37.080 --> 00:17:40.840 Russia and the United States. 154 00:17:40.840 --> 00:17:47.960 In brief, national income estimates have a very limited value, a far more modest value 155 00:17:47.960 --> 00:17:51.060 than is now commonly supposed. 156 00:17:51.060 --> 00:17:57.300 They might have some value in comparing the national incomes of two different countries 157 00:17:57.300 --> 00:18:04.020 if the figures in both countries were compiled by the same methods and largely arbitrary 158 00:18:04.020 --> 00:18:11.380 or conventional standards, if both countries have the same monetary standard, say gold, 159 00:18:11.380 --> 00:18:18.900 and if complete freedom of currency convertibility and of trade prevailed. 160 00:18:18.900 --> 00:18:26.660 Such comparisons have little value when currency ratios are fixed by government, UKs or exchange 161 00:18:26.660 --> 00:18:34.980 control rather than by free markets or free convertibility into a common commodity. 162 00:18:34.980 --> 00:18:39.100 Its Dangers for Policy 163 00:18:39.100 --> 00:18:46.380 It is impossible, in some, to arrive at a precise scientific, objective or absolute 164 00:18:46.380 --> 00:18:51.120 measurement of the national income in terms of dollars. 165 00:18:51.120 --> 00:18:57.760 But the assumption that we can do so has led to dangerous policies, and threatens to lead 166 00:18:57.760 --> 00:19:01.860 to even more dangerous policies. 167 00:19:01.860 --> 00:19:08.460 Policy implications, in fact, are already found in the national income approach. 168 00:19:08.460 --> 00:19:14.500 For this embodies an attempt to deal with economic problems, starting from an arbitrarily 169 00:19:14.500 --> 00:19:18.740 The 170 00:19:18.740 --> 00:19:21.440 Acting Individuals 171 00:19:21.440 --> 00:19:28.460 This macroeconomic, as differentiated from the microeconomic approach, raises first 172 00:19:28.460 --> 00:19:35.300 of all the question, why is the nation considered the collective to be chosen and not the state 173 00:19:35.300 --> 00:19:43.540 State, State of New York, the Municipality, City of New York, the Borough, Manhattan, 174 00:19:43.540 --> 00:19:49.440 or on the other side, the continent, America, or the whole world. 175 00:19:49.440 --> 00:19:54.800 The chief answer to this question is that the choice of the collective is determined 176 00:19:54.800 --> 00:19:58.540 mainly by political considerations. 177 00:19:58.540 --> 00:20:05.140 Many of our American progressives aim at an equalization of incomes within the United 178 00:20:05.140 --> 00:20:10.300 States, but not at a world equalization. 179 00:20:10.300 --> 00:20:16.740 This political tendency explains also why these people are always talking about the 180 00:20:16.740 --> 00:20:23.900 distribution of the national income and not about the contribution of the various individuals 181 00:20:23.900 --> 00:20:29.220 and Groups of Individuals to its Coming into Existence. 182 00:20:29.220 --> 00:20:35.680 Logically, the contribution problem ought to be considered first. 183 00:20:35.680 --> 00:20:41.980 Much of the national income discussion is dominated by the Marxian thesis according 184 00:20:41.980 --> 00:20:49.740 to which goods are socially produced and, afterwards, individually appropriated. 185 00:20:49.740 --> 00:20:55.900 I have said that though the government compiles quarterly estimates, both of gross national 186 00:20:55.900 --> 00:21:02.540 product and of national income, it is the former figure that is much more frequently 187 00:21:02.540 --> 00:21:03.940 cited. 188 00:21:03.940 --> 00:21:10.780 This is partly because it appears earlier, as a private firm knows its gross income before 189 00:21:10.780 --> 00:21:17.620 it knows its net income, and partly because it is the larger figure. 190 00:21:17.620 --> 00:21:20.500 Real planners love big figures. 191 00:21:20.500 --> 00:21:26.780 We are constantly being told that we, the government, can easily afford to spend or 192 00:21:26.780 --> 00:21:35.100 give away, say, to foreign governments, this or that huge sum, because it is, after all, 193 00:21:35.100 --> 00:21:40.920 only such-and-such a percentage of our gross national product. 194 00:21:40.920 --> 00:21:48.280 No one would dream of considering such reasoning valid as applied to a private firm. 195 00:21:48.280 --> 00:21:57.640 The average industrial company's net profit, for example, amounts, 1956 through 1957, 196 00:21:57.640 --> 00:22:03.680 to only five or six cents on every dollar of sales. 197 00:22:03.680 --> 00:22:10.360 There are great deductions to be made from gross national product before we can estimate 198 00:22:10.360 --> 00:22:12.680 National Income. 199 00:22:12.680 --> 00:22:25.140 For example, in 1957 gross national product was estimated at $440.3 billion, whereas national 200 00:22:25.140 --> 00:22:32.560 income was estimated at only $364 billion. 201 00:22:32.560 --> 00:22:40.880 In arriving at the latter figure, some $34 billion was deducted for depreciation charges 202 00:22:40.880 --> 00:22:47.920 and some $38 billion for indirect business taxes. 203 00:22:47.920 --> 00:22:52.660 But depreciation charges are the result of estimates. 204 00:22:52.660 --> 00:22:58.720 The right amount of depreciation is never precisely known. 205 00:22:58.720 --> 00:23:05.540 Contrary to the belief of laymen and even of many accountants, a depreciation charge 206 00:23:05.540 --> 00:23:14.680 is not so much an estimate of past deterioration as a forecast of future probabilities. 207 00:23:14.680 --> 00:23:21.440 It is never known, for example, when an old machine is going to be made obsolete by a 208 00:23:21.440 --> 00:23:29.600 a New Invention, and particularly in a period of monetary inflation such as we have been 209 00:23:29.600 --> 00:23:37.640 undergoing for the last generation, depreciation charges are systematically underestimated 210 00:23:37.640 --> 00:23:44.640 because they fail to allow forever-mounting replacement costs. 211 00:23:44.640 --> 00:23:51.800 Another bad practice to which a too literal reliance on national income figures has led 212 00:23:51.800 --> 00:23:58.960 is that of insisting on the urgency of a certain rate of growth of the national income, no 213 00:23:58.960 --> 00:24:02.560 matter what level it has already reached. 214 00:24:02.560 --> 00:24:10.920 Thus, a report of the Rockefeller Brothers Fund in 1958, looking ten years ahead, came 215 00:24:10.920 --> 00:24:18.120 came up with the remarkable discovery that an economic growth rate of 5% a year would 216 00:24:18.120 --> 00:24:27.040 lead to a bigger growth in 10 years than a 3% rate or even a 4% rate. 217 00:24:27.040 --> 00:24:33.560 This insistence on achieving or maintaining a certain rate of growth is the result of 218 00:24:33.560 --> 00:24:36.520 several misconceptions. 219 00:24:36.520 --> 00:24:43.580 Professor G. Warren Nutter has pointed out that there is a long-run tendency for the 220 00:24:43.580 --> 00:24:51.540 industrial growth rates to slow down or retard as the level of production gets higher. 221 00:24:51.540 --> 00:24:55.620 There are several basic explanations of this. 222 00:24:55.620 --> 00:25:00.260 One has to do with a trick of percentage figures. 223 00:25:00.260 --> 00:25:06.180 Another has to do with a physical satiety point in human needs. 224 00:25:06.180 --> 00:25:14.240 If only one family in a country has a bathtub and the next year fifty families get one, 225 00:25:14.240 --> 00:25:18.440 the rate of growth is five thousand percent. 226 00:25:18.440 --> 00:25:23.920 But once everybody has a bathtub, net growth stops. 227 00:25:23.920 --> 00:25:32.020 This principle applies to houses, automobiles, radios, television sets, etc. 228 00:25:32.020 --> 00:25:38.540 In addition, as we have just noticed a little while back, as more and more things become 229 00:25:38.540 --> 00:25:45.700 plentiful, except dollars, there might even be a tendency for the national income figures 230 00:25:45.700 --> 00:25:53.260 to reflect this by falling, because prices might fall faster than output rows. 231 00:25:53.260 --> 00:25:59.740 Still another practical danger of the religious use of national income figures is that it 232 00:25:59.740 --> 00:26:06.780 can lead to a confusing or reversal of economic cause and effect. 233 00:26:06.780 --> 00:26:14.060 The national income of a given year is the total result of all the production and transactions 234 00:26:14.060 --> 00:26:16.300 during that year. 235 00:26:16.300 --> 00:26:22.620 In this respect, the national income figures are similar to the account books of a private 236 00:26:22.620 --> 00:26:24.060 firm. 237 00:26:24.060 --> 00:26:30.420 But more and more, in current discussion, one finds the national income figure treated 238 00:26:30.420 --> 00:26:33.140 as a cause of production. 239 00:26:33.140 --> 00:26:40.300 The national income is thought of as the purchasing power that automatically creates and buys 240 00:26:40.300 --> 00:26:42.540 the production. 241 00:26:42.540 --> 00:26:49.260 The truth is that the national income is the production itself, looked at from another 242 00:26:49.260 --> 00:26:50.780 side. 243 00:26:50.780 --> 00:26:58.980 Broadly speaking, national income does not cause national production, but national production 244 00:26:58.980 --> 00:27:02.620 causes national income. 245 00:27:02.620 --> 00:27:09.740 In so far as the causation is the other way round, it is because of the truth in that 246 00:27:09.740 --> 00:27:18.840 very Say's law that the Keynesians and national income addicts tell us has been discredited. 247 00:27:18.840 --> 00:27:26.780 The national income figures seem to have given birth to all sorts of cause and effect fallacies. 248 00:27:26.780 --> 00:27:35.400 For example, if we look at the composition of the national income figures for, say, 1957, 249 00:27:35.400 --> 00:27:48.640 we find that part of the GNP total of $440.3 billion is arrived at by including $87.1 billion 250 00:27:48.640 --> 00:27:52.880 for government purchases of goods and services. 251 00:27:52.880 --> 00:28:01.520 When the national income figures of $364 billion for that year are broken down into specific 252 00:28:01.520 --> 00:28:09.840 industries, we find that nearly $43 billion is unaccounted for by government and government 253 00:28:09.840 --> 00:28:10.840 enterprises. 254 00:28:10.840 --> 00:28:17.840 It is easy to jump to the conclusion, which Keynesians do, that if it were not for these 255 00:28:17.840 --> 00:28:39.080 People with a less favorable opinion of the role of government would point out that whatever 256 00:28:39.080 --> 00:28:45.040 the government spends, it takes away from somebody in taxes. 257 00:28:45.040 --> 00:28:50.800 This applies also to the hidden tax involved in monetary inflation. 258 00:28:50.800 --> 00:29:00.040 Undoubtedly, such government employees as policemen, firemen, judges and road builders 259 00:29:00.040 --> 00:29:06.760 do increase by an unassertainable amount real national income. 260 00:29:06.760 --> 00:29:13.800 But it may be questioned whether such agencies as price controllers, rent boards, the tariff 261 00:29:13.800 --> 00:29:40.080 If we think of the national income as a mere lump overall sum in dollars and it falls short 262 00:29:40.080 --> 00:29:47.680 of some goal by X billion dollars, it is a tempting step for economic planners to assume 263 00:29:47.680 --> 00:29:54.840 that the X billion dollars could be easily supplied by that much deficit spending or even 264 00:29:54.840 --> 00:29:58.420 by printing that much money. 265 00:29:58.420 --> 00:30:05.520 This leads indirectly to inflation, for we can raise our national income to any figure 266 00:30:05.520 --> 00:30:13.480 Here We Want simply by depreciating the dollar enough to raise prices to reach that income. 267 00:30:13.480 --> 00:30:21.680 In Germany in 1923, the national income in marks actually rose to hundreds of billions 268 00:30:21.680 --> 00:30:29.000 of times higher than its previous level, because the paper mark was depreciated to one trillionth 269 00:30:29.000 --> 00:30:32.460 of its former purchasing power. 270 00:30:32.460 --> 00:30:38.960 To be sure, when explicitly taxed with the point, economic planners will say that their 271 00:30:38.960 --> 00:30:46.360 goal is a national income of X billions in dollars of present purchasing power. 272 00:30:46.360 --> 00:30:50.620 But they forget this qualification in actual practice. 273 00:30:50.620 --> 00:30:56.660 They are always citing the latest national income figures in terms of the latest and 274 00:30:56.660 --> 00:30:59.120 most inflated dollar. 275 00:30:59.120 --> 00:31:06.420 They do not stop to remind us, or even themselves, of how much the national income would have 276 00:31:06.420 --> 00:31:13.200 to be written down to reflect the price level of, say, 20 years ago. 277 00:31:13.200 --> 00:31:20.600 The national income approach has become one of the important incitements to inflation. 278 00:31:20.600 --> 00:31:28.800 For the easiest and surest way to get constantly bigger national income figures is not by increasing 279 00:31:28.800 --> 00:31:35.800 Output and Consumer Satisfactions, but by constantly shrinking the measuring rod, by 280 00:31:35.800 --> 00:31:39.760 constantly depreciating the dollar. 281 00:31:39.760 --> 00:31:46.320 It remains to be pointed out, finally, that economic forecasting based on aggregative 282 00:31:46.320 --> 00:31:52.280 economics or the national income approach has been a failure. 283 00:31:52.280 --> 00:31:59.600 David McCord Wright, who declared that In practical experience, the Keynesian forecasters 284 00:31:59.600 --> 00:32:07.480 have quite a poor record, cites in evidence the egregious failure of most Keynesian forecasts 285 00:32:07.480 --> 00:32:15.080 after World War II, which was very largely due to an unexpected upward jump of the consumption 286 00:32:15.080 --> 00:32:16.080 level. 287 00:32:16.080 --> 00:32:26.840 Similarly, he adds, in 1953 and again in 1958, the Keynesian models of mechanical interrelationships 288 00:32:26.840 --> 00:32:32.260 between investment and consumption did not work out. 289 00:32:32.260 --> 00:32:37.340 This judgment corroborates that of John H. Williams. 290 00:32:37.340 --> 00:32:43.580 The consumption function in particular has given the mathematicians an ideal concept 291 00:32:43.580 --> 00:32:48.900 for Building Models of National Income and Making Forecasts. 292 00:32:48.900 --> 00:32:53.900 Thus far, the forecasts have been almost uniformly bad.