Attention: all economics students. Perhaps the most prominent equation in macroeconomics is that national income (essentially the sum of profits and wages) equals net national product, which is the sum of consumption plus net investment.
Because consumption is much larger that net investment, it
is almost universally assumed that it pays the bulk of national income. However,
most spending in the economic system is actually not consumption.
RATHER, IT IS CONCEALED UNDER NET INVESTMENT.
Net investment is the difference between two enormous sums:
a minuend consisting of the total of business spending for capital goods and
labor, and a subtrahend consisting of the costs that are deducted from sales
revenues in calculating profits.
The minuend contains additions to asset accounts (plant and
equipment and inventory and work in progress) while the subtrahend contains subtractions
from asset accounts, notably depreciation and cost of goods sold. Selling,
general, and administrative expenses appear equally in both the minuend and the subtrahend.
The difference between additions to and subtractions from
asset accounts is the net change in those accounts, i.e., net investment.
The minuend in calculating net investment is where the bulk
of spending in the economic system lies. I call this spending “productive
expenditure.”
The concept of productive expenditure is not recognized in
contemporary economics. It is believed that it is somehow included in
consumption expenditure and that to recognize it separately would constitute
the error of “double counting.”
For further elaboration and proof, including a thorough discussion of the issue of “double counting,” see Chapter 15 of my Capitalism: A Treatise on Economics. It’s available at https://amzn.to/2PM19ut
Read this chapter, tell your economics professors about it,
and ask them to show you what’s wrong with my claim that most spending takes place
under the head of net investment.
