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Source link: http://archive.mises.org/7771/standing-keynesian-gdp-on-its-head-saving-not-consumption-as-the-main-source-of-spending/

Standing Keynesian GDP on Its Head: Saving Not Consumption as the Main Source of Spending

February 13, 2008 by

According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere nonspending and thus a “leakage” from the spending stream. This dogma underlies much of government economic policy in the United States, including the so-called economic stimulus package that has just been enacted. In this article, I prove, to the contrary, that consumption is not the main form of spending in the economic system and that the source of most spending is, in fact, saving. I prove my claims by starting with the very formulations of the expenditure aggregates presented by the Keynesian doctrine itself.

Thus, the simplest, core accounting relationship of Keynesian economics is that national income, which is essentially the sum of profits plus wages, is equal to the sum of consumption expenditure plus net investment.

It is only a small step from national income to gross domestic product (GDP). Essentially all one does is add business depreciation allowances to profits on the left-hand side of the equation and to net investment on the right-hand side. This last raises net investment to what contemporary economics calls gross investment. The sum of consumption plus gross investment is held to equal GDP. FULL ARTICLE


john February 13, 2008 at 9:32 am

the link to the rest of the article does not work.

Greg February 13, 2008 at 9:39 am

I think it is here


Wladimir Kraus February 13, 2008 at 10:04 am

I’ve been saying for years that George Reisman deserves (at least one) Nobel Prize in economics.

Compare the analysis he presents in this article (if you like this, read the entire chapter 15, plus chapters 16 -18 of his book Capitalism. The latter is devoted exclusively to positive economics of Keynes) with the work of last year’s Laureates, for example. The one is work of a genius capable of transforming the entire science of economics, while writtings of others are more like children’s plays than serious science.

Inquisitor February 13, 2008 at 10:52 am

This is precisely what I had in mind yesterday Wladimir, except I had Mises in mind. Both his and Dr Reisman’s insights would cause huge shifts in economics, and are far more revolutionary than anything illuminated by this year’s Nobel prize winners. Why the fuss over such small things is beyond me.

Nelson February 13, 2008 at 11:32 am

I’ll have to reread this and absorb more of it. I’ve always hated traditional macro economics because it seemed nothing more than a circular system of equations and definitions without underlying meaning. The notion that a dollar spent by the government was just as good as a dollar invested by the private sector was just absurd to me, as was the notion that exports minus imports had any meaning.

Pen Name February 13, 2008 at 3:24 pm

I always enjoy reading literature about the shortcomings of national income accounting. However, I find it impossible to actually calculate the alternative measures of national income. I spent a couple days trying to compute Gross Domestic Revenue (see: “Why the GDP Shows No Bust, But GDR Does”) and another few days trying to compute Rothbard’s Private Product Remaining (see: “GNP, PPR, and the Standard of Living”).

I suppose I am unable to calculate these measures because the BEA’s national accounts are poorly organized. I sent an e-mail to the BEA asking which line items should be included to calculate Johnsson’s “costs other than depreciation of fixed assets”, and of course they were unable to provide an answer in their response.

Can anyone help me determine which specific line items to include from the BEA GDP report to compute Reisman’s “sales minus cost plus wages”? Again, I’m looking for the line items as they appear in GDP report. Thanks so much.

Here’s the link location to a PDF with the all the GDP accounts: http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp407a.pdf

If you would like to include cell numbers instead, here’s the link location to an excel sheet with all the GDP accounts: http://www.bea.gov/newsreleases/national/gdp/2008/xls/gdp407a.xls

Bruce Koerber February 13, 2008 at 3:46 pm

If the criteria for the Nobel Prize in economics is a thorough understanding of economic principles and a flawlessly systematic presentation of the economic logic underlying issues of economic importance then George Reisman would be one of the few on the list for consideration.

Hopefully the Royal Swedish Academy of Sciences will make the necessary adjustments in their criteria requirements to make their award meaningful.

Inquisitor February 13, 2008 at 3:50 pm

“I’ll have to reread this and absorb more of it. I’ve always hated traditional macro economics because it seemed nothing more than a circular system of equations and definitions without underlying meaning. The notion that a dollar spent by the government was just as good as a dollar invested by the private sector was just absurd to me, as was the notion that exports minus imports had any meaning.”

I’ve had similar distaste for it. It seems rather vacuous on the whole.

Ron February 13, 2008 at 4:00 pm

I have what may be a stupid question. Do wages paid count as costs, or are they two separate items? So, for instance, if in one month, a business pays $A for overhead (electricity, water, rent, upkeep, etc.), $B for inventory, and $C for wages, does profit equal revenue minus A, B, and C, or does profit not include wages?

When Mr. Reisman says, “…national income equals the sum of profits plus wages,” it seems like wages are being counted twice, as profit would be revenues minus costs, and I would assume wages paid to employees are considered a “cost”.

Hopefully the question makes sense. I’m no accountant (obviously), and I’m trying to make sense of this. I may have totally missed the boat on this particular point, though, so any help would be appreciated.

Fred Furash February 13, 2008 at 4:34 pm

Remember, it’s not the Royal Swedish Academy of Sciences doing the awarding. It’s the The Sveriges Riksbank.

Somehow I don’t see a central bank awarding a nobel prize to an Austrian. FRB and criticism of how banks transfer wealth from the people to themselves springs to mind as reasons.

newson February 13, 2008 at 8:54 pm

in his analysis using bea figures, gerard jackson of brookesnews.com (austrian economics downunder!) arrives at aggregate spending being roughly 2.5x gdp.
private consumption comes in at 28% of total spending.
the link is http://www.brookesnews.com/071911useconomy.html

professor reisman is right to attack the “consumption-is-two-thirds-of-gdp” refrain. it rolls of the tongue of every talking head and is the invitation card for all sorts of keynesian spending initiatives.

George Reisman February 13, 2008 at 9:36 pm

This is in answer to “Ron”: Wages are income to wage earners and costs to businessmen. However, to the extent that wages are added in to asset accounts, i.e., plant and equipment or inventory/work in progress, they are income to wage earners but not yet costs to businessmen. They’ll be costs as the plant and equipment are depreciated or as the inventory is sold.

George Reisman February 13, 2008 at 9:43 pm

This is in answer to “Pen Name”: To my knowledge the BEA doesn’t calculate costs other than depreciation. You could estimate total costs if you first could estimate total sales revenues (corporate and proprietors’). Then you could subtract corporate profits and “proprietors’ income.” The BEA may have data on corporate sales. Breaking out cost of goods sold and expensed expenditures would be more difficult.
At every step, it would be important to avoid any “imputations” and capital consumption and inventory valuation adjustments inserted by the BEA.

Ron February 14, 2008 at 2:35 pm

Thanks for the…um…clarification, George. I still don’t quite understand, though that is through no fault of yours. I know why I’m not an accountant…this stuff makes my head hurt.

However, your point about wages paid to government employees being consumption expenditures made me realize that all taxes and fees paid to government are, in fact, consumption expenditures, as they aren’t spent with the purpose of making future sales. Most of them could even be considered sunk costs, which don’t really figure into GDP, but if considered could be more appropriately classified as the “leakage” so touted by Keynesians.

CS February 14, 2008 at 8:00 pm

Having taken only one high school and one college course in economics, it has since seemed obvious to me that placing emphasis on consumer spending as an engine of growth is simply illogical. If all we need to do is “create more Demand” to improve the economy, everyone in the world should be rich. As far as I can tell, Bill Gates demands far more than he is getting or could hope to produce even. (One hasn’t been able to buy eternal life, for example, since the Reformation.) Wanting and needing things is quite easy compared to working hard and being innovative. Leftist economists seem to be interested in schemes that trick the laws of nature. Since life is not equal, fair or just; they believe that they have the power to tweak complex societies with little or no side effects.

All the money injected into the economy from the “stimulus package” would have been spent anyway by the government, unless more money is being printed; which is most likely the case. What is interesting is that were I not married, the extra money I have earned doing side jobs; would have put me just out of reach to get any tax rebate. “Luckily” my spouse makes less and we will get a rebate. Here we see where there is a negative incentive to be productive. I would much rather spend my rebate on beer and trans fats than do freelance projects after work. Since everyone qualified to do these projects makes a somewhat similar wage, perhaps the job doesn’t get done at all. Or more realistically, it gets done, but something else is left undone or done more poorly. How does any of this help the economy?

Steve February 14, 2008 at 10:44 pm

The BEA Input-Output (I-O) tables have the data you are looking for–

Total Output = $24.7 trillion
GDP = $13.2 trillion

I-O Tables
Use Table
The Use of Commodities by Industries before Redefinitions (1997 to 2006)

Or, take a look at the Corporate Tax Return data from the IRS

Total Receipts = $20.7 trillion
GDP = $10.7 trillion


Steve February 14, 2008 at 11:06 pm

Actually, here’s some even better data from the IRS-


Per-Olof Samuelsson February 16, 2008 at 2:17 am

There are a few admirers of Reisman in Sweden (myself included). But I doubt that any of us has any influence on Sveriges Riksbank.

Depressing, isn’t it?

CrisisMaven March 28, 2010 at 6:11 pm

I have a feeling that one simple way to refute the Keynesian multiplier and thus most of its theory is often overlooked or underutilised: that it can’t work because ir has to extract the very same money first before it can (re)invest it. Thus the effect, even if it were genuine, would be offset by one of equal force when levying the money minus (!) what’s lost in the tranmission.

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