A Fundamental Contradiction in Keynes' Conception of Income

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A Fundamental Contradiction in Keynes' Conception of Income

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Kepa M. Ormazabal () (Departamento de Fundamentos del Análisis Económico I, Universidad del Pais Vasco, Spain)

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Kepa Ormazabal

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.

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Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 200309.

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Date of creation: 16 Jun 2003
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Handle: RePEc:ehu:biltok:200309

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Postal: 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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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing

This paper has been announced in the following NEP Reports:

NEP-HPE-2003-07-10 (History & Philosophy of Economics)
NEP-MAC-2003-07-10 (Macroeconomics)

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This page was last updated on 2009-11-20.

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