Scott Sumner’s Funeral: A Shovel-Ready Project
Sumner keeps digging himself deeper on this issue of “income is meaningless and pernicious.” To refresh your memory, Scott first advanced this thesis here. Then I criticized his view here.
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.
Here are a few responses:
1. If I sign a contract to work at Poduck U for $100,000 during calendar 2011, that does not tell me my income for 2011, it tells me how much money Podunk will give me for services rendered. Of course I care about indivual prices and wages, as they influence my economic decisions. But the major factor determining my income for 2011 is the capital gains or losses I will earn on my vast portfolio.
2. If I want to see whether a company is doing well, I look at it’s stock price, not the income reported by accountants. The recent Facebook movie argued that even before it started raking in the cash, it was building up valuable intellectual capital. That got reflected in the stock price but not the P&L statement put together by accountants.
3. I still don’t see the PURPOSE of income. It’s the wrong variable to tax, it’s the wrong variable to use when looking at economic inequality, it’s the wrong variable to look at to see how Facebook is doing, it’s the wrong variable to look at when I decide how much to consume. So what’s its purpose?
I will answer your other questions eventually, but you’re dodging the main one, Scott: Are you saying accountants should STOP calculating income statements? Or are you conceding that probably there is some reason for these things, you just aren’t sure personally what it is? (For an analogy, if I opened the hood of my car, I would have no idea what most of the stuff did. But I wouldn’t call them meaningless, pernicious, and misleading.)
OK a better response:
1. If I sign a contract to work at Poduck U for $100,000 during calendar 2011, that does not tell me my income for 2011, it tells me how much money Podunk will give me for services rendered. Of course I care about indivual prices and wages, as they influence my economic decisions. But the major factor determining my income for 2011 is the capital gains or losses I will earn on my vast portfolio.
Scott, there are two problems here. First and most serious, remember that I am including capital gains in my definition of income; it is YOU who want to treat labor income as “really income” while capital gains are “congealed labor” or something. So you have again flummoxed me, by now explaining that your decisions are guided more by your capital gains/losses than by your labor income.
Second, you are agreeing with my point: You are here conceding that your economic decisions are guided by your income. The fact that $100,000 is chump change compared to your capital gains / losses (and are you just making a joke?! You’re saying you make much more than $100k in annual capital gains?) is only knowable because of the number. If Podunk U had offered you a salary of $10 million, then that labor income would be more significant. Hence, you are agreeing that the size of your paycheck is of course a huge factor, guiding how much you consume.
2. If I want to see whether a company is doing well, I look at it’s stock price, not the income reported by accountants. The recent Facebook movie argued that even before it started raking in the cash, it was building up valuable intellectual capital. That got reflected in the stock price but not the P&L statement put together by accountants.
Don’t you think speculators in the market–the ones who squeeze out arbitrage opportunities etc. so that you don’t need to do any work–rely on accounting statements? Are you saying that Fortune 500 companies should just fire all their accountants, or at least tell them to stop drawing up P&L statements, because these figures are pernicious and misleading?
Oh another point: The shareholders of Facebook saw huge incomes when the stock price went up. So my economic concept doesn’t somehow miss this fact.
I am not familiar enough with corporate accounting to say where this kind of thing shows up on their books, if anywhere.
I fear I may be getting in over my head with two titans in combat but I must say that when Prof. Sumner argues about his present circumstances I keep yelling at my computer that I probably did not have a capital gain for the first 15 years of my work life. All I cared about was my salary income and all my decisons were based on this hoping to someday save enought to have capital gains. Yeah, if I was 55 or so, and saved $50,000 a year for 30 years I would be thinking capital gains. But, I still decide based on salary not on capital gains.