National Income and Outlay

Colin Clark

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781136919930
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

First published in 1937. An update of 'The National Income' 1924-1931. This volume collates four years of continuous work on the question of amount of expenditure on certain commodities, including new data on income from since 1932, including the Occupation and Industry volumes of the 1931 Census.

Chapter I
Purpose and Definition of National Income Measurements

NEARLY all the propositions of economic science are concerned with statements about the national income. "Generally speaking," writes Professor Pigou in the Economics of Welfare, "economic causes act upon the economic welfare of any country, not directly, but through the making and using of that objective counterpart of economic welfare which economists call the national dividend or national income. Just as economic welfare is that part of total welfare which can be brought directly or indirectly into relation with the money measure, so the national dividend is that part of the objective income of the community which can be measured in money." The propositions of economic science are largely concerned with questions of whether particular measures will have a beneficial or adverse effect upon the national dividend. The measurement of the national dividend, unfortunately, has hitherto been regarded as one of the most difficult and uncertain branches of statistical science. As a result, economic theories are rarely put to the test of fact, and modern economics has shown a lop-sided development in an over-theoretical direction, of which outside critics justly complain.

Professor Pigou's Economics of Welfare gives the clearest and most concise statement known to me of the whole purpose of economic study. The framework around which the book is written is that the economist must discover methods which will advance, and counsel the rejection of proposals which will hinder, the following three objects:

• (1) To increase the average national dividend.
• (2) To regularise its flow through time.
• (3) To equalise its distribution between persons.

The student of economics soon becomes aware that proposals which may advance one of these objects will injure another, and it is the duty of the economists to attempt to find methods for balancing the gains and losses of human welfare caused thereby.

Professor Pigou's point of view has won wide acceptance throughout the English-speaking world. Some opponents deny in effect that economics has a "purpose". They say that it is a "science" concerned with discovering how the economic mechanism works, without any preconceived ideas of the use to which this knowledge can be put. Such writers are generally sceptical about the existence, or at any rate the measurability, of Economic Welfare, the central subject of Professor Pigou's work. Those who feel so strongly that economics is a pure science should be those who are most anxious to apply the scientific canon of bringing each hypothesis to the test of fact, but this is by no means always the case.

Others, while willing to accept Professor Pigou's statement of the purposes of economic science, think it important that its propositions should be stated in an ethically neutral form. Professor Sargant Florence, in a recent pamphlet,¹ proposes to rewrite the Economics of Welfare, substituting for the words " good " and " bad ", whenever they or similar adjectives occur, the words " irrend " and " non-irrend ". This new adjective is coined as a concise way of defining any measure calculated to increase, regularise the flow, and equalise the distribution of the national dividend. He points out that the study of economics has fallen into much discredit and confusion owing to our failure to keep clear the distinction between Knowledge, Purpose and Application. If our grammar were as perfect as that of the ancient Greeks, we would make the three sorts of statements in the Indicative, Optative and Imperative moods, and who knows if a better grammar might not even promote clarity in our thought? At any rate, Professor Florence would have all treatises on economics written in the Indicative Mood, with the introduction of one or two new adjectives. Economists will not be free of their "superstitions, dogmas and prejudices " until they confine themselves to statements of facts and causes, and eschew all mention of the purposes to which their knowledge can be put, or of the methods and agencies by which it can be applied. "Science is open," he writes, "to be used by all comers."

¹ Uplift in Economics, Kegan Paul, 1929.

Many of us (particularly those who, like myself, began life as physical scientists) hope that within a measurable time economics will have acquired the same degree of completeness of information, of unanimity between its professors, and prestige with the general public, as the older sciences enjoy today. But it is doubtful whether these ends will be achieved by a renunciation of statements of the purpose to which this knowledge must be put. Economic science is at the same time difficult and incomplete, abstract and yet touching closely the prejudices and convictions of everyday life. Professor Florence concedes that economists, provided they "sum up their findings in the indicative mood, may, in their other capacities, express their wishes and recommendations". Professor Pigou, after having been careful to describe in a measurable and objective manner the purposes to which he would like to see economic science applied, throws the whole weight of conviction behind them, and in a memorable passage addressed to the student beginning the study of the subject, tells him that "the complicated analyses which economists endeavour to carry through are not mere gymnastic, but are instruments for the bettering of human life ". He might perhaps have added, that the economist must be content sometimes to see the knowledge which he has created used for purposes of which he may heartily disapprove.

My own position on this question, so far as national income studies are concerned, follows (as I understand it) that of Professor Pigou. There is some purpose in discovering and in saying that the national income has increased from £4000 millions to £4400 millions during a certain period, though nobody supposes that this means a 10 per cent improvement in economic welfare. There is some purpose in stating that the average income produced per worker is £250 per year, and that nearly half of the product is taken by 10 per cent of the population, although no presumption is involved as to whether the national income, if redistributed equally, would not work out to a lower, or higher, figure per head.

The national dividend must always be conceived in real, but measured in money, terms. The measurement of differences through time or between different countries always involves therefore the difficult practical and theoretical problems concerned with index numbers, which will be dealt with in a later chapter. In any case, however, a dividend consisting of an infinite variety of goods and services can only be reduced to a common measure by means of a money unit. We may as a standard take the dividend of any place or time we wish, and by the use of price index numbers express other real dividends in terms of this standard. This process can never claim complete logical watertightness, but we can be satisfied that it works well enough in practice for comparisons over periods up to, say, twenty years, or for comparisons between communities whose ways of living are not too widely different. Comparisons over a wider range of time or space must become less reliable, while comparisons between the average real dividend per head in, say, Britain and India, or between the twentieth century and the Middle Ages, can only be accepted subject to very big qualifications. This does not imply, however, that they are not worth making.

The money dividend of a community is thus a clearer concept than the real dividend, and although for most purposes we want to translate money dividends into real terms, there is a certain utility in the measurement of money dividend alone, as is the case, for instance, in the study of industrial fluctuations.

The national dividend may be defined for any period as those goods and services which flow into being during that period which are customarily exchanged for money, avoiding, of course, double reckoning of those goods and services which are produced at one stage but then used up again in another stage of the productive process. We require a net total of the value of goods and services available for consumption or investment.

We may next draw a distinction between what is described as gross and net income. Net income corresponds to the above definition subject to a deduction equal to the cost of repairing and (in the course of years) replacing all the capital instruments used up in the production of the dividend; gross income is before the provision of such allowances. In commercial terminology, the deduction for any one year will cover all repairs and maintenance, as well as depreciation and obsolescence properly attributable to that year (the actual payments under these heads during the year may have been greater or less than this). It will be seen that these allowances must be to a considerable extent a matter of conjecture. For this reason gross income is a more precise concept than net income, and for certain purposes at any rate is equally useful.

In our original definition, by the use of the phrase customarily exchanged for money, we have drawn a line excluding certain services, enumerated by Marshall as " the services which a person renders to himself and those which he renders gratuitously to members of his family or friends; the benefits which he derives from the use of his own personal goods, such as furniture and clothes Marshall also seeks to exclude the services supplied by public enterprise {roads, water-supply, education, defence and the like), but modern "economists in every case now include the value of such services in the national dividend. It is clearly absurd that the services provided by a school or a water-system should be reckoned as part of the national dividend if they are run as commercial concerns, but should cease to be so reckoned if they are taken over by the State or municipality.

The money measurement of the national income will comprise therefore all goods and services provided by capitalist enterprise, reckoned at the prices at which they are actually sold. Of the services provided by public enterprise, those which are sold in the market (e.g. postal services, municipal trading services) will similarly be reckoned in at the prices at which they are actually sold; others, such as public health services or free education, must be reckoned in at cost price. This will represent the value of materials used, the wages and salaries paid to public servants, and the interest on capital borrowed by the State or municipality for the purpose of these services.

These distinctions are not a mere pedantic necessity, for in many communities a substantial proportion of the national dividend is provided by communal enterprise.

Returning to our criterion of "customary exchangeability", we may reasonably regard services rendered by public authorities as exchangeable for money, either in the form of rates and taxes, or directly. The utility which a private individual derives from his own stock of goods, clothes, furniture, crockery, motor-car and the like, is not customarily exchangeable for money. On the other hand, the leasing of houses is certainly a customary form of exchange, and if a man occupies a house which he himself owns, we should regard the annual value of the house, as indeed do the British income-tax authorities, as part of his income. By the same token we must define dwelling-houses as capital in that they will produce real income or dividend in the future, while denying the appellation of capital to private motor-cars, furniture and the like.

Will the national income be equal to the sum of all individual incomes, and if not, by what items will they differ? Before we can go any more deeply into the question of how far the national income, as we have defined it, differs from the aggregate of private incomes, as the ordinary man understands his income, we must examine more closely the customary concept of income. We may take as our standard the definition of income used for the purposes of British income-tax assessment.

The forms of return sent out every year to British income-taxpayers give a full statement of those expenses which may, and which may not, be deducted for the purpose of computing income. Income saved or devoted to capital purposes is still income, and is subjected to tax (in some countries, however, is taxed at a lower rate); but apart from income devoted to capital expenditure, all " expenses incurred for the purpose of the trade " are deductible. In the British income-tax system the taxpayer is also allowed to deduct under the following heads:

• Expenditure actually incurred on the repair and maintenance of plant, machinery and (in effect) of buildings.
• An allowance for depreciation and obsolescence ("wear and tear") of plant, machinery, etc., and an allowance for buildings.
• Costs of replacement of plant, machinery, etc., so far as the cost of replacement exceeds the total of allowances which have been made in previous years under wear-and-tear provisions.
• Bad debts.
• Writing down of inventories to current price-level, if that is below the cost price of the goods.
• Trading losses incurred at any time within the past six years.
• Incomes derived from agriculture are assessed on a nominal basis which in the majority of cases understates the true income.

No deductions are allowed for:

• Expenses of maintenance of the persons assessable or their households.
• Sums paid in direct taxation.
• Amortisation of natural wasting assets (e.g. coal seams).
• Depreciation of the value of securities, land or other assets held by the taxpayer: in the same way appreciation of such assets is not reckoned as a positive contribution to income.

The principal difference between the British system and those of the United States of America and Germany is in the last item. Under certain circumstances in these two countries appreciation of capital values is reckoned as part of taxable income, and depreciation of values is reckoned as a deduction. In some countries income from agriculture is not subject to taxation: in Britain, as we have seen, it is only partially so subject.

Does the official definition of income do violence in any respect to the ordinary man's concept of income? Certain British industrialists complain about the inadequacy of the wear and tear allowances, but it is not always realised that if the cost of replacing the machinery turns out to be greater than the allowances which have been made, an additional allowance can be claimed. In fact, such allowances are very rarely claimed, and it therefore appears that the official scales of allowance are adequate.

The railway companies, however, and a very small number of industrial concerns, make no claim for wear and tear allowances, electing to be assessed to tax by the alternative method, under which replacements are treated as a deductible expense.

In the Finance Act, 1932, all scales of wear and tear allowances were increased by 10 per cent. It is difficult to say whether this should be regarded as a form of tax concession to particular types of industry, or as giving official recognition to the contention that the rate of obsolescence of machinery has become more rapid during recent years. It is more convenient to regard it as the latter, and to accept the total of wear-and-tear allowances as it stands.

This method of calculating income, however, does probably do violence to the ordinary concept of income in respect of amortisation allowances on natural wasting assets. The value of a mine, for instance, may be being gradually exhausted with the using up of the accessible seams in order to earn its current income; on the other hand, it is always possible that new technical or mechanical discoveries may have the opposite effect, and add value to seams hitherto considered worthless. It is probably the administrative impossibility of assessing a fair amortisation allowance in such cases that has caused its exclusion from the British tax system. In the United States income-tax administration, however, allowance is made for the amortisation of wasting assets such as oil-wells. A similar question might arise when agricultural land is made to yield a certain pet income by methods which exhaust the fertility of the soil. On the whole, therefore, we must interpret our concept of the national dividend, as we have hitherto been building it up, as the dividend available subject to deduction for any demonstrable exhaustion of natural resources.

We can now answer, in as general a manner as possible, the question briefly posed, as to what extent, if any, the national income should be expected to differ from the sum of individual money incomes, and we can then compare this ideal standard with the practice adopted hitherto in the principal countries of the world.

In the first place, we must allow for the fact that certain individual incomes do not correspond to the creation of any tangible service and do not therefore by our definition represent any contribution towards the national income. Such are incomes derived from public relief and private charity, allowances made to relatives and friends, and Old Age and Widows' Pensions paid by the State. Income received as interest on War Loan must be excluded. Professor Pigou points out that this rule applies even if we assume that the money spent on the War was "productive " in the sense that it prevented invasion and the destruction of material capital that is now producing goods sold for money, for whatever product War expenditure may have been responsible for in this way is already counted in the income earned by the material capital. In the same way, War Pensions should not be counted as part of the national income. However, interest on a national debt incurred for productive purposes, or on municipal debt, should be reckoned as part of the national income, as contributing to the value of useful services rendered by these public authorities. And pensions paid to retired employees of the State, or of particular firms, should be regarded economically as a form of delayed payment for services performed, or part of the cost of supplying those services, and should be included in the national income.

It is clear that the incomes of public officials, even if they are derived from taxation and not directly from the sale of goods and services, should be included. Also the incomes and remuneration in kind of domestic servants and of personal assistants. Some authors fall into confusion on this point, and say that income reckoned in this way is counted twice; a rich man has a considerable income, out of which he pays a large number of personal servants, or provides for their maintenance, and some people think that from...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• CHAPTER I PURPOSE AND DEFINITION OF NATIONAL INCOME MEASUREMENTS
• CHAPTER II POPULATION AND INCOME-EARNERS
• CHAPTER III INCOMES ASSESSABLE TO INCOME-TAX, 1924-33
• CHAPTER IV THE WHOLE NATIONAL INCOME
• CHAPTER V THE DISTRIBUTION OF THE PRODUCT OF INDUSTRY
• CHAPTER VI REDISTRIBUTION OF INCOME THROUGH TAXATION
• CHAPTER VII INDEPENDENT DETERMINATION OF THE NATIONAL INCOME
• CHAPTER VIII THE ACCUMULATION OF CAPITAL
• CHAPTER IX PRICES, REAL INCOME AND SHORT-PERIOD DETERMINATION OF THE NATIONAL INCOME
• CHAPTER X HISTORICAL STATISTICS OF NATIONAL INCOME
• CHAPTER XI PRODUCTIVE SOURCES OF INCOME
• CHAPTER XII CHANGES IN CONSUMPTION, INVESTMENT, PRICES AND COSTS IN THE TRADE CYCLE, 1929-36
• CHAPTER XIII THE RATE OF ECONOMIC PROGRESS
• APPENDICES
• STATISTICAL INDEX