Keynes Summary of Chapter 6 - Income,Income, Saving and Investment

Income

To comprehensively define income we first state:
A – Sales, A1 – cost of sales, G – Capital Equipment. Some part of A+G-A1 will pertain to Capital Equipment before current period. To define income of current period, we deduct from A+G-A1 an amount that refers to value given by equipment from previous period. Calculating said sum enables us to define income. There exists two methods for attaining such: one (i) pertains to production; the other (ii) to consumption.

(i) We define G as net result of maintenance and depreciation for capital equipment during production of output. B’ is that spent on maintenance even if not used in production. Having spent B’, G’ is the worth of it at period end i.e G’ – B’ is, assuming its’ not used to produce A, maximum net value conserved from previous period. Further G-A1 is that used to produce A. So (G’-B’)-(G-A1) is U, user cost of A. A’s factor cost, F, is amount paid out to other factors of production. And prime cost of output A is F + U.
Income then is excess of output value over prime cost, and is causally significant for employment. We assume user cost is positive, since it’s negative only when an entrepreneur has increased capital equipment by his own labour. We note aggregate Consumption (C) as ∑A-A1 and aggregate investment (I) as ∑A1-U. And –U is an entrepreneurs investment (with U his disinvestment) relating to his own equipment. Hence consumption = A and investment = -U where A1=0. Also, effective demand is I an entrepreneur expects to get. An aggregate demand function relates various hypothetical employment quantities to expected output yields; and effective demand is the point on it which becomes effective as, related to supply, it equates to employment level which maximises entrepreneur’s profits.

(ii) Involuntary losses can affect capital equipment values, so-called “Acts of God”. These are “insurable risks”. We define supplementary cost (V) as excess depreciation over user cost. Subtracting income and gross profit from V yields net income and net profit. So, aggregate net income is equal to A – U – V. Windfall loss pertains to changing equipment value, due to unforeseen factors. Net income is crucial when an entrepreneur decides his spending limits. Another is the windfall gain/loss on capital account. His consumption is determined by excess of current account proceeds over sum of prime and supplementary costs – a windfall loss has lesser impact than equivalent supplementary.

Supplementary costs estimation depends on accounting method used, thou its’ expected value is known. The allowance for supplementary costs can be calculated on the basis of current values and expectations at the end of an accounting period. It is more accurate when doubt exists to assign an item to the capital account and to only include what supplementary costs are definitely belong there. Supplementary costs are important because they effect consumption.


Savings and Investment

Any reservations regarding the meaning of savings stems from doubts regarding it’s components, which are simplistically income and expenditure. As income is defined earlier expenditure remains indistinct. Furthermore as expenditure refers to the value of goods sold to consumers during that period it is the definition of a consumer-purchaser which we seek. A distinction between consumer-purchaser and investor-purchaser serves as an inevitable distinction between consumer and entrepreneur thus defining A1 as the value of what one entrepreneur buys from another. Consumption then equals the total sales made during the period less the total sales made by one entrepreneur to another or ∑ (A – A1). With this definition for consumption and with income equalling A –U it follows that saving equals A1 – U with net saving equal to A1 – U – V.

The part of the income which has not passed into consumption being current investment allows us to derive A1 – U as the investment for the period while A1 – U – V allows for impairment in value giving the net investment. Traditional usage of the great majority of economics implies:
Income = value of output,
current investment = the part of current output not consumed
saving = income-consumption
Therefore saving = investment.

In addition to this relationship saving can be defined as a mere residual and the act of investment causes saving to increase by a corresponding amount. This is due to psychological habits which offer the market the opportunity to settle allowing readiness to buy to equal readiness to sell.