A Fundamental Contradiction in Keynes' Conception of Income

Kepa Ormazabal

No 1134-8984, BILTOKI from Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística)

Abstract: I contend that Keynes provides two contradictory definitions of aggregate income. According to the first definition, which is the dominant in Keynes as well as the standard in current Macroeconomics, the full value of output becomes income in the aggregate. This view can be traced back, at least, to Adam Smith. According to the second definition, on the contrary, not the full value of output becomes income, but only the part of it not required to make up for capital consumption. This view can be traced back to the Physiocrats. In the "General Theory", Keynes inconsistently appeals to these two contrary views, as I show by analyzing his treatment of the concept of "user cost". In chapter 3, user cost becomes income and investment gives rise to income; in chapter 6, in the first half, approximately, user cost does not become income and investment does not give rise to income. I contend that the first definition is wrong, whereas the second is right. The first definition of aggregate income leads to the erroneous principle that investment gives rise to income. The second definition implies that investment does not give rise to income, but to a change in capital.

Keywords: national accounting; income accounting; Keynesian economics (search for similar items in EconPapers)
Date: 2003-02
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Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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