Algebra now allows
creation = growth + flow passed out - flow passed in, (3.3a)
since terms can change sides if they reverse signs.
Economics is interested in creation and growth of value. Value in the stock sense means capital in general. Most economists most of the time use the word to mean only the “physical capital” we buy and sell. But the truism works for anything. | sometimes prefer the generality of “value”, meaning any amount of any mix of human and physical capital. This again can be called either “total capital” or value
interchangeably.
Flow of value passed out is exhaust plus transfer out, and flow passed in is transfer in. Creation of value is output in the net sense. Then (3.2) and (3.3a) give the total
return rule
output = growth + cash flow. (3.3b)
“Income” means rights to output, and is implicitly equal to output. Like most writers
in economics, I will use these words more or less interchangeably too.
Now comes the centerpiece. A good starting point is the present value rule. We assemble value or total capital to satisfy foreseen tastes. But we also satisfy current tastes by spending current cash flow. At the scale of the total capital (value) of the individual, were reinvestment cancels internally, cash flow simplifies to exhaust in
taste satisfaction plus gift given less gift received. Then
individual cash flow = net gift + exhaust, (3.4)
where net gift means gift given less gift received.
Chapter 3: Foundations 1/11/16 12
HOUSE_OVERSIGHT_010983