Book 2, Chapter 4: Income & Capital

This chapter begins by defining income as the product of capital, which comes primarily in the form of money (unlike in more primitive times).

§2. When defining income, it’s not only necessary to include monetary income but also the implicit income that one enjoys by performing services for oneself (cooking, cleaning) that could be contracted out to others for payment. Marshall’s definition here predates and contradicts that given to GDP/GNI, which only include monetary measures. He then adds that the non-financial benefits of work should be included in the total of “net advantages” of work — net referring to the deduction of disadvantages as well as the fact that a non-enslaved person will only work for net advantages. As a related point, people seek work with the best net advantage — not just money income and considering disadvantages (e.g., commuting).

Marshall then gives the classical definition of business profit: The return on capital in excess of that which could be earned by investing the same amount of capital in the markets (aka, riskless rate of return). These excesses are the “returns on management” (aka, entrepreneurial profits).

Marshall then specifies that “rent” should refer only to “income derived from the free gifts of Nature” (p62), rather than the price of using someone’s capital (renting a flat or piano), which he prefers to call “quasi-rent.”

§3. Some quibbles about the definitions of “capital.”

§4. Marshall shifts to discussing “social production,” within which  business production is included, but the gifts of Nature (aka ecosystem services) are not. Marshall thus focuses human production while avoiding the extra work to track down every bit of value, since values that arrive  without effort or notice are hard to measure.

§5. Society derives income from three productive “agents” of land, labor and capital, but the division of that national income to those agents may not match originating causes. Marshall includes the “free gifts of nature” such as mines and fisheries in land. He excludes the income (benefits) derived from private capital, such as furniture and clothes, since that income does not pass through social exchange.

§6. Marshall worries about double counting in calculating national income.

§7. Marshall argues that income (net of depreciation), not wealth, is a better measure of a nation’s prosperity. We measure GDP but have little idea of national — let alone natural — wealth.

§8. Capital is an agent of production, wealth is the result of that production.

… and that’s the end of Book 2!



Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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