Quesnay and Leontief on Capital and Income

I analyze Quesnay's explanation of the "Tableau Economique" of 1766 in order to show that he made a clear distinction between capital and income. In holding this distinction, Quesnay rejected the nowadays currently accepted views that the full value of the national output is equal to aggregate income and that the value of national output is equal to the payments to labor, capital and land. I analyze the foundation upon which Quesnay established the distinction and show that it is sound. In so doing, I also discuss the validity of Phillips' standard interpretation of the "Tableau" in terms of input-output tables. I show that this interpretation distorts Quesnay so seriously that it attributes to him the rejection of the distinction of capital and income. On the theoretical basis provided by the analysis of Quesnay's distinction, I contend that Leontief's input-output tables do not show that the aggegate value of output is equal to aggregate income, but the contrary, that is, that Quesnay's distinction was right.national accounting, income accounting, input-output analysis

Dornbusch and Fischer on Capital and Income

In this paper I critically analyze the relationship that professors Dornbusch and Fischer establish among the concepts of GNP, NNP and aggregate income. In principle, aggregate income is NNP; indeed, the whole point of introducing the concept of NNP is to determine what is the income of the economy in the aggregate. The definition of NNP excludes depreciation from aggregate income. But depreciation must be made good, and it must be so out of current production. On the ground that the factors that produce the goods that make up for depreciation must be paid, Dornbusch and Fischer conclude that the value of the portion of current output that makes up for depreciation becomes income in the aggregate. Since it is indubitable that the value of the other portion of output (that which consists of the goods not required to make up for depreciation) becomes income too, then it follows that aggregate income is GNP, not NNP. Then, Dornbusch and Fischer hold contradictory views. The cause, which I attempt at diagnosing in this paper, is a miscomprehension of the nature of capitalistic production.national accounting, accounting identities, capital accounting, national income accounting

A Fundamental Contradiction in Standard Rent Theory: A Case Study on Varian's "Intermediate Microeconomics"

In this paper, I examine Varian’s treatment of rent in his textbook on Microeconomics. I argue that he holds contradictory conceptions: sometimes rent is defined as surplus over cost whereas sometimes it is defined as cost, as the opportunity cost of fixed factors. I start by arguing that the distinction between fixed and variable factors is not the key for the definition of rent; ultimately, it is monopoly. Varian’s conception of rent is, essentially, Ricardo’s: rent is extraordinary profit turned rent. On the basis of a selfinconsistent notion of opportunity cost, Varian introduces the idea that rent is the opportunity cost of land, when what he actually defines is the opportunity cost of not renting the land. I also critically examine the related notion of “producer’s surplusâ€, and show that Varian’s treatment repeats the same contradiction as in rent.

Profit and Cost in "Modern" Post-Marxian Profit Theory: A Case Study from Varian's "Intermediate Microeconomics"

In this paper, I examine the treatment of competitive profit of professor Varian in his textbook on Microeconomics, as a representative of the “modern†post-Marxian view on competitive profit. I show how, on the one hand, Varian defines profit as the surplus of revenues over cost and, thus, as a part of the value of commodities that is not any cost. On the other hand, however, Varian defines profit as a cost, namely, as the opportunity cost of capital, so that, in competitive conditions, the profit or income of capital is determined by the opportunity cost of capital. I argue that this second definition contradicts the first and that it is based on an incoherent conception of opportunity cost.

A new look at Marx's refutation of Ricardo's refutation of the labor theory of value

This paper was presented at the 2011 Annual Conference of the European Society for the History of Economic Thought, held at Bogacizi University, Istanbul, from 19 to 21 May 2011.labor theory of value, Ricardo, Marx

Profit as Cost versus Profit as Surplus over Cost: A Case Study on Varian's "Intermediate Microeconomics"

On the analysis of Varian’s textbook on Microeconomics, which I take to be a representative of the standard view, I argue that Varian provides two contrary notions of profit, namely, profit as surplus over cost and profit as cost. Varian starts by defining profit as the surplus of revenues over cost and, thus, as the part of the value of commodities that is not any cost; however, he provides a second definition of profit as a cost, namely, as the opportunity cost of capital. I also argue that the definition of competitive profit as the opportunity cost of capital involves a self-contradictory notion of opportunity cost.

Mas-Colell, Whinston and Green Versus Scitovsky on Profit and Utility Maximization

I contrast the theoretical foundation of profit maximization of Mas-Colell, Whinston and Green’s “Microeconomics†against that provided by Scitovsky in a paper of 1943. Whereas Mas-Colell, Whinston and Green try to show that profit maximization can be derived from utility maximization, Scitovsky categorically states the contrary view. I argue, first, that the foundation provided by Mas-Colell, Whinston and Green is not sound and, secondly, that Scitovsky’s line of reasoning opens a better way to model business behavior.profit maximization, utility maximization, business behavior

Adam Smith on labour and value: challenging the standard interpretation

This paper was presented at the Seminars of the Department of Foundations of Economic Analysis I, University of the Basque Country in September 2004.

Adam Smith on Capital and Income

In this paper I critically analyze Smith's thesis in book I, chapter 6 of the “Wealth of Nations†that the replacement of the capital goods consumed in production becomes fully income. I argue that Smith’s argument is defective and does not imply this, and that, once it is properly corrected, it implies that the full value of commodities does not become income; in other words: that GNP is not equal to aggregate income. On this basis, I proceed to analyze Smith's definitions of gross and net income in book II, chapter 2. I hold that they contradict Smith's previous and fallacious argument of book I, chapter 6, and imply, rightly, that the value of aggregate output is not equal to aggregate income. There is a fourth part in the price of commodities which is not income at all, but capital. In book II, ch. 2 Smith makes contradictory statements about wages and does not reach a definition of gross and net income. The cause of these contradictions is the extension of the error about capital consumption to wages. If Smith had kept to the Physiocratic brut-net distinction, he would have seen that the capital of the economy is made up not only by the investments on productive means other than labor, but also by the investments on labor (wages), which do not belong in income even though they represent a part of the value of the output of consumption goods. Finally, I clear up a mistake in Marx’ comments upon Smith on the subject of capital and income.Adam Smith, value theory, national income accounting

A Fundamental Contradiction in Keynes' Conception of Income

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 Theoryâ€, Keynes inconsistently appeals to these two contrary views, as I show by analyzing his treatment of the concept of “user costâ€. 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.national accounting, income accounting, Keynesian economics