Spencer Heath Archive

Item 1891

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/COMPUTING NATIONAL INCOME/

 

     Up to the time of Adam Smith, the prevailing authoritarian doctrine as to the wealth of nations was that the wealth of a nation was to be measured by the quantity of precious metals, chiefly gold and silver, that the nation physically possessed. Accordingly, the amount of the national income or deficit for any period was to be measured by the difference between the amount of precious metals held within its borders at the beginning and at the end of the given period.

     The publication of Adam Smith’s Wealth of Nations had a profound influence on the public and professional thinking of its own and of succeeding times, so much so that economists began to reckon wealth in terms of desirable commodities in general instead of precious metals alone. But this led to considerable uncertainty and confusion, for though Smith had laid great stress on the importance of increasing a nation’s wealth through increase in the commodity trading of its citizens both at home and abroad, he also recognized the existence of intangible wealth in the form of services which, although not wealth or commodities in the physical sense, were nevertheless capable of being exchanged and of being used or consumed as such. The term wealth, in its physical sense at least, was not broad enough to include the entire subject-matter of production and trade or the entire object of acquisition for which they were being carried on. Clearly it was not for increase in commodities alone that production and exchange were being performed. Something more and different from the material products of labor applied to land was the subject-matter of trade and exchange. Attempt was made to resolve the difficulty by use of the term satisfactions as inclusive of both, but these were found to be wholly intangible and subjective, not susceptible of objective measurement and thus impossible of any ascertainable equivalence one with another or with any measurable quantity of services or wealth in exchange. Also among writers a tendency developed to bring in services as a kind of shadowy sub-category under the general term wealth, sometimes expressly, sometimes by implication only, and sometimes not included at all.

     In every widening field of discovery or understanding its tangible and material objects, always at first, and often exclusively, attract attention of the mind. Interrelationships, processes and operations come later, affording the new basis for a functional instead of a merely structural and static understanding. The development of functional physiology above merely tangible anatomy is but one example of this.

     The act of exchange involves a present interrelationship between personalities. The mere production of wealth is only a change of relationship between man and his non-human environment. It does not of itself involve any relationship of contract or exchange. It is a physical process that in itself is devoid of any social significance, and such it remains, whether or not it is carried on in the hope or anticipation of exchange. The only act that in and of itself benefits the exchangee is not any prior or present physical act; it is the act of exchange itself in which the exchangor is the active party (often called the party of the first part) and the exchangee is the passive party. (The reason that both parties are not at once both exchangors and exchangees is that in a market economy the desired physical or personal benefit to the exchangee is immediate and direct, whereas the exchangor receives only a versatile token that insures future benefit to him when he in turn becomes an exchangee as hirer, purchaser or lessee. The cause for sellers being so often obsequious to buyers lies in the fact that any degree of political domination of the market makes it more difficult to distribute than it is to produce, and goods are more often surplus than scarce.) It may thus be argued that the recompense that a seller receives is rather for his act of exchange than for the goods or services in reference to which the act is performed, since it is this act alone of which the market takes any account and by which benefit comes to the exchangee. However, for the purpose of computing national income the total of recompenses for the making of sales contracts, including re-sales, would be far from a substantial guide. /This is/ because the only new contribution to the whole is the difference between cost and sale-value — net profit.

     But it can be maintained that net income, the difference between the outlay essential to production or procurement of any property or services sold and the price realized, does represent a contribution to the national income, and that the total of all such net incomes before taxation represents the dollar value of all contributions to the exchange system within the given period — the measure of the values given or, what is the same, the recompenses received.

     The national income thus ascertained over successive periods provides a running index of the total of all contributions to the market economy in terms of dollars or whatever may be the prevailing exchange unit; and this when divided by the total number of contributors becomes an index to the productivity, in both services and goods, of the average contributor. And if he either spends and consumes or saves and invests as many dollars as he receives during the stated period, then this average net income represents the average value and well-being derived from the market in recompense for the average contribution thereto. There is, however, one important exception to be made: so much of the national income as is withdrawn from the general market without making or having made any corresponding contribution to it, as by taxation or other compulsion or stealth, diminishes the incomes of all who have contributed thereto. And further, if any fiat or otherwise counterfeit dollars, not representing contributions to the market, have been used by government or by others to withdraw from the market goods and/or services that all others, as sellers, have contributed thereto, then their economic well-being is not truly represented by the national income in dollars until after deduction of the total number of counterfeit dollars so employed. In any case the average economic well-being per contributor is represented by so much of the national income as they are permitted to retain, divided by the total number of contributors to the market by whom it is received.

     This method of computing national income as the total of all net incomes, above the purchase or production costs of goods, properties or services sold, rests upon recognition that the exchange economy is purely and exclusively an exchange mechanism or organ of society. The market produces nothing, neither services or commodities, nor properties of any kind. It only indicates, under the blessings of free competition, the changing ratios (the rationality) in which all these can be distributed without violence and advantageously to all. It takes no account of individual circumstance or condition, for in it the diverse desires of all are integrated in an instinctive social will to the life and well-being of the whole.