Marshall’s pupil Keynes was thoroughly a marginalist, as are economists in general today and as am I. One of the features of his General Theory of 1936 was a kind of double-entry accounting for national product. Product was output and equivalently income. Output meant the sum of prices of final products produced within the year, while income meant the shares of that sum paid to the workers and investors
producing it. His double-entry idea can be put as
output = investment + consumption = income = pay + profit. (6.19)
I showed why | disagree. But let us see how the total return truism might seem to
have led to that inference if we leave workers or human capital outside the economy.
To treat them as arriving exogenously from outside is essentially to treat the national economy as if it were a single firm. Output inside is simply profit. Output
outside is work, meaning creation of value by the workers. This gives the truism output = work + profit,
confirming that total output is the sum of factor outputs.
So far, so good. But now Mill and Keynes and most tradition slip by arguing that pay
equals and compensates all of work and nothing else. That’s why (6.18) equates
output to pay plus profit. Schultz and Ben-Porath and other students of human
capital correct this in part by recognizing some work as self-invested rather than
marketed for pay. My pay rule adds that pay recovers human depreciation as well as
realized work. (6.19) should have reasoned
output = income = work + profit
= pay + self-invested work - human depreciation + profit. (6.20)
Chapter 6: Parallels with the Firm 2/4/16 22
HOUSE_OVERSIGHT_011056