THE WORLD OF GOODS AND THE FLOW OF PRODUCTION
“The world is like a shop stocked full of goods. They are on sale for work—toil may buy them.”*
FRIEDRICH VON LOGAU (1604-1655)
1. The Social Product and the National Income
Now that we have studied the structure of the division of labor and discovered in money the indispensable auxiliary of that division of labor, let us go a step further and examine more closely the process which unfolds on these bases, namely, how goods are supplied and distributed.
Let us emphasize at once that the concept “economic good” must be understood in a very broad sense; i.e., it includes all those things which serve as means for satisfying wants. In our economic system these are things for which, as a rule, a price must be paid. Hence, this concept embraces not only material goods as such, but also a wide variety of services (a lawyer’s counsel, a physician’s examination, a scholar’s lecture, a singer’s concert) and a final category that may be grouped under the loose designation of “rights and relationships” (right to use a dwelling, patents and copyrights, a physician’s practice, the “goodwill” of a firm, etc.). The criterion of price does not always suffice to characterize an economic good. This is especially true in respect to those collective goods which, as in the case of measures taken to ensure internal and external security (e.g., protection against epidemics), satisfy a collective need. These goods the state “produces” and distributes according to the system of collective economy. Thus the work done by a civil servant is an economic good albeit there is no “market” for it. Indeed, it is because of this very circumstance, as we have shown previously (Chapter II, Note 5), that we cannot always be sure that such a “good” answers to a general need.
A procedure which proves useful on several counts is to consider, in concrete terms, the total output of goods and services produced by the nation in a given period of time, say a year. This total yearly output we may term the social product (or gross national product), a helpful abstraction of which we shall make use frequently henceforth. It should be remarked that the total of available goods is not identical with the total of consumable goods. A large part of the gross national product is composed not of consumption goods, but of producer goods (capital) which serve for the maintenance of the apparatus of production (renovation, replacement) and also for the extension of that apparatus (expansion, net investment, accumulation of capital). To determine the net national output (i.e., the supply of commodities and services which constitute a real addition to the national economy and which are over and above those required to maintain the productive apparatus intact), we must subtract from the total output (gross product) those goods and services needed for replacement purposes. This subtraction we may designate as “the costs of doing business.” Anyone who has ever figured out an income tax will know what this means. An economy in which reserves are not built up to the necessary extent would “eat” its capital; it would “feed on its own substance.” Its productive apparatus would fall, bit by bit, into a state of disrepair and, as a consequence, national output would become smaller and smaller in the future. This, in fact, is what occurred in many countries during and after both World Wars.
Just as we designate as personal income what remains at our disposal after subtracting our costs of doing business, so too may we regard national income. If this national income is represented in terms of goods and not of money, it is identical with the net national output. Hence, national income may be determined from a study of gross output statistics. In practice, however, it is customary to calculate the national income in another way, viz., by adding together personal incomes, a fact which gives rise to several instructive considerations. For example, do the monthly allowances given to students by their parents figure in the national income? Obviously not, since what may be included under national income are only those incomes arising from the actual production of goods, services, and utilities of whatever kind. Such incomes are a kind of monetary reflection of a corresponding addition to the total of real goods (original income). Clearly, we may not include in the total income those incomes which represent merely transfers of original income (derived income). Otherwise, we would be making the mistake of counting the same thing twice. On the same reasoning, we would not be counting the same thing twice were we to include in the national income the incomes of the household domestic and the government clerk since these incomes result from the “production” of immaterial goods, proof of the demand for which is the fact that they have been paid for.1 These reflections underscore the broad interpretation which must be given to such concepts as “good” and “productive” if we wish to grasp the essence of economics.