I figured Scott would say, “OK, ya got me, I was just speaking in hyperbole because income taxes drive me bonkers.” But no, Scott doubled down. First he quoted me, when I wrote:
In the comments section of his first post, I asked Sumner if he had a problem with the standard definition of income. I reminded him that it is the amount of consumption that one could afford, without reducing the value of capital. Sumner replied, “I do not object to your definition. … I guess ‘meaningless’ was a bit strong, but what possible use is there for a concept that measures how much consumption one could do [without] impairing one’s wealth?”
This reply actually flummoxed me; it’s akin to asking what possible use there is for the concept of profit. Specifically, a household needs to calculate its income, in order to know if it is “living beyond its means.” We can make the analysis more esoteric if we wish. For example, one of the key issues in Austrian business-cycle theory is that people during the boom period enjoy a false prosperity — a high standard of living — because they are unwittingly consuming their capital. These crucial issues are dependent on the basic definition that Sumner finds useless.
Scott then replied:
I hate it when people quote my comments; often my brain is fried by the time I answer my 100th comment in a day. But I’ll stick by this one. Profit is useful because it tells firms whether to enter or exit an industry. Positive economic profit suggests you should enter, and negative economic profit is a signal to exit. But income is a signal for . . . what? Surely not for consumption. Yes, it tells you how much you can consume without digging into capital, but why would you want to consume that much? I had negative income in 2008, but I didn’t decide to do negative consumption. I dug into my capital—which Bob suggests is violating the recommendation of Austrian business cycle theory. Entschuldigen sie bitte! (That’s ’sorry’ in Austrian.)
Cue the music.
OK I will make this brief, since Scott needs to work on his next blog post promoting counterfeiting. Here goes:
(1) Note the goofy rhetorical move, by which Scott tries to demonstrate that one’s consumption is independent of one’s income. OK I can do the same thing, to “prove” profit has nothing to do with whether a business enters or exits an industry. “Scott, I know a business owner who lost money in 2009. And yet he didn’t exit the industry! That violates your I-call-myself-a-conservative-but-I’m-not-really economic views!” How do people feel about my demonstration? Should we now throw out “profit” as a meaningless concept?
(2) Scott, suppose you get a job from a rival school. But they don’t tell you how much your new income will be. Does this matter to you? If you did accept the new job, without knowing your paycheck, you’re saying you would be fine? That bit of information wouldn’t influence any of your personal financial decisions, like say, how big a house you would buy in your new city?
(3) Scott, how far are you going to push this farce? Are you claiming that accountants are wasting their time when they draw up Income statements for firms? (And if so, do you realize that an income statement is also called a profit-and-loss statement?)
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As always, I want to reiterate that Scott Sumner is a really really sharp guy. That’s why I continue to grapple with him. For example, by the end of this recent post Scott almost had me applying to be a Fed governor, so sure was I that I could centrally plan the economy.