I realize this is inside baseball and maybe 95% of you don’t care, but I have real work to do so this occupies my attention…
Major Freedom has been doing his best to escape from the power of my simple point that savings is income minus consumption. He claims that this is a muddled statement because the units don’t even match; he claims income is a flow concept while consumption is a stock concept.
Because I dug up Mises explicitly saying that savings is production minus consumption, MF was forced into saying that production is also a stock concept. (Otherwise Mises would be as muddled as Murphy.) So I asked him what happens when someone produces something and earns an income on it? I’m waiting to hear how we wriggle out of that. (I.e. you would have to earn an income over a time period, even though production is allegedly a stock concept.)
Also relevant, here is Murray Rothbard on pages 419-420 of Man, Economy, and State:
It is clear that the gross savings that maintain the production structure are the “productive” savings, i.e., those that go into productive investment, and that these exclude the “consumption” savings that go into consumer lending. From the point of view of the production system, we may regard borrowing by a consumer as dissaving, for this is the amount by which a person’s consumption expenditures exceed his income, as contrasted to savings, the amount by which a person’s income exceeds his consumption.
If I didn’t know any better, I would say that Rothbard is endorsing my claim that over a defined time interval, savings = income – consumption. But Rothbard can’t be as muddled as me, so I must be wrong.
Also, in accounting the income statement is certainly a flow concept. You don’t say, “What’s your income statement for July 6, 2011, at 4:55pm?” Rather, you say, “What’s your income statement for the 3rd quarter of 2011?”
And yet, if my eyes don’t deceive me, the income statement calculates net income by looking at gross revenues and subtracting various expenses that were incurred during the period in question. It almost sounds like spending is a flow concept. More muddled, Keynesian thinking.
(To drop the cuteness: Major Freedom is focusing on the fact that when you consume, you spend money in bursts to buy consumption goods. Right, but by the same token, when you earn income, you receive money in bursts. Yet even Major Freedom admits that income is a flow concept, defined over a period of time. In contrast, your cash balance or your inventory of physical capital goods is a stock concept–it is defined for a particular moment in time.)
UPDATE: I am not doing any more posts on this, I promise. (Unless Paul Krugman links me or something.) One last point to illustrate how hopeless Major Freedom’s position is: Remember, he had to say that production is a stock concept, in order to reconcile his claim that consumption is a stock concept with Mises’ quotation saying savings is production minus consumption.
So look at how tangled that move makes us: I would say, “In a free market, workers get paid according to their marginal product.” MF agrees, I take it. And yet, workers pay (income or wage rate) is clearly a flow concept. So how can they be paid according to marginal product, unless marginal product is also a flow concept?
Another example. I bump into Henry Ford and ask him, “How much production does your factory yield?” He says, “100 cars.” Does anyone see why his answer is ambiguous?
In contrast, if I say, “How many drill presses does your factory have?” and he says, “100,” there is no ambiguity at all.
Does everyone see why? (Everyone except Major Freedom, I mean.)