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Income: Saving and Investment BEFORE considering the theory of distribution as a whole it will be necessary to deal with a series of concepts which are relevant to much that has gone before but have not yet been specifically discussed; the concepts of income (with its correlative, expenditure or "outgo") and of saving and investment; together with various subsidiary concepts which are closely related to one or more of these. 1. We may start with "income". We already know something about its meaning for economic theory. In particular we have seen that it is closely correlated with "capital" in two at least of the main senses of that word. Whereas a community's "capital" may be understood to mean its total wealth at a given moment of time, its "income" is the wealth which it acquires or produces during a period of time. So, too, we may give the name of "capital" to the claims which any individual in the community holds against other individuals (or against a business unit or public authority); and these claims are first and foremost claims to income--to the regular receipt of freely disposable wealth or purchasing power. In both cases income is conceived of as a "flow", capital as a "fund"; the difference turns upon our treatment of time. It follows that we can treat income in either of two ways, according as we are interested in the total quantity of wealth accruing to an individual or community during a given period, or to the rate at which that wealth accrues. Thus in the case of labour we may contrast the total sums paid to a worker during a week or a year, or while he occupies a particular post, with the sums he is paid per unit of time--e.g. per hour, or per day. The former is an amount of wages, the latter is a rate of wages. In the same way we can distinguish between amounts and rates of rent or interest. Not merely that, but rates of income are themselves susceptible of more than one interpretation. For we may relate the amounts received either directly to the time over which they are received, or else to the services for which they represent payment. In the one case our rate is a "time rate", in the other it is a "piece rate". For many purposes, indeed, it is immaterial which of these possible methods of expressing income is adopted. But often the distinctions are of substantial importance. Thus, we may be concerned with the consequences of a speeding-up of work in a factory or industry. When this takes place, then if the time rate of wages remains the same, the piece rate must fall, while if the piece rate remains the same the time rate must rise. Similarly, a shortening of the hours of work per day will involve a changed relationship between hourly wage rates and daily or weekly wage rates. Again, as we shall see in the next chapter, it can be argued that profit, though it is clearly a form of income in the first main sense--in that it is an amount of wealth accruing to the profit-receiver in a given period of time--is yet not properly speaking an income in the second main sense. If so, it will follow that the concept of a rate of profit is meaningless. 2. These complications apart, however, let us observe that the concept of income can be interpreted on three different levels of analysis. In a money economy it usually takes the form of money payments to the income receiver. But he uses the money so acquired for the purchase of goods and services; and if we prefer we can regard as his "income" the concrete wealth of which he thus gains possession. Finally, this wealth is itself desired by him because of the enjoyments it can yield; so that behind the flow of income goods there lies a flow of satisfactions or utilities. We can thus distinguish (1) money incomes; (2) commodity incomes; (3) subjective or "psychic" incomes. These three concepts are not quite so simple as they at first sight seem. Let us look at them more closely. (1) Money incomes, we have seen, are generally thought of as representing incomes which are paid to the income receivers in the form of money--i.e. media of exchange. But even in a fully developed monetary economy a not inconsiderable part of some people's total incomes is paid "in kind"--e.g. in the form of free board and lodging or of privileges and perquisites. Are we to say, then, that the "money" incomes of such people are lower than their "commodity" incomes? Formally this would no doubt be perfectly accurate. But for most purposes it is not particularly helpful. For if we are interested in income from the point of view of the analysis of value, the contrast between payments in money and payments in kind cannot be of vital importance. What concerns us is the total wealth or purchasing power which a given income represents--the amount of commodities which it enables its receiver to acquire and consume. And this being so we shall probably want to express "in money terms" even those income goods which come to him without the intervention of the medium of exchange. Once this has been done we can describe his whole income as a "money income"; but the phrase will now refer, not to the actual money payments he receives, but to the total wealth accruing to him as measured and expressed in terms of the standard of value. The word "money" has come to denote units of value, not pieces of exchange media. It is important to bear in mind the distinction between these two senses of "money income", if only because of its implications for the relationship between money income and commodity income. If we adopt the cruder standpoint, then this relationship depends upon the customs and institutions which govern income payments at the period or in the trade under consideration; and all that we can say in general terms is that money income may be less than or equal to goods income, but cannot be greater. If, on the contrary, we mean by "money income" value income, then we can lay down that there must be an exact correlation between it and commodity income; for the former is now merely a way of expressing the latter. (2) "Commodity income" may also be interpreted in two different ways. The word "commodity" may refer either to material goods or, more generally, to services -- whether the services rendered by material goods themselves or the personal services which one person may provide directly for another. Of these two the latter meaning is the more fundamental, at any rate for theoretical purposes. For the distinction between services which are and services which are not embodied in material goods is not merely extremely difficult to draw with accuracy, but is at bottom technical rather than genuinely economic in significance. Correspondingly we may expect to find that if income is conceived of in "commodity" terms it will take the form of a flow of services rather than of material goods; since almost everyone spends some part--it may be a very large part--of their money incomes on the purchase of personal services (e.g. on the wages of domestic servants) and these clearly must be included in any complete account of their "commodity" incomes. Economists have, however, usually found it convenient to speak as though commodity incomes were composed primarily, if not exclusively, of material goods. This is in itself readily understandable; for an aggregate or flow of physical objects is much easier to handle and envisage than a flow of immaterial and evanescent services. But it is important that the dangers of such a usage should be clearly recognised. On the one hand, if we think of commodity incomes in material terms, then we have no right to include within the scope of the term those objects of expenditure (such as personal services) which are not embodied in actual physical goods; since by doing this we shall make our income stream into an assortment of wholly incommensurable elements--we shall in fact force it to flow on two different levels at once. If personal services are to be included in commodity income at all, the latter must be conceived in immaterial terms. And on the other hand, we must remember that even when both interpretations are possible they do not necessarily coincide in range or scope. Suppose I devote a part of my quarterly money income to the purchase of an article of furniture -- say an armchair for my study. Reckoned in material terms this will naturally be thought of as constituting a part of my commodity income for that quarter. But it may continue to serve me for (perhaps) twenty years or more. And the services it yields must be counted as entering into my commodity income in the immaterial sense for the whole of that period. Moreover, the income it yields from this latter point of view is in principle capable no less than the chair itself of being measured and expressed "in money terms" and so of being counted in my "money income" (in the wider sense of that phrase) so long as the chair is in use; not merely that, but I may be able to correlate the services it yields directly with my actual money receipts and expenditure-namely, if instead of purchasing it outright I hire it or buy it on the instalment system. So too with all long-lived multipleuse goods; if we think of them as constituting a part of commodity income, we are neglecting the essential difference between the time at which they are actually acquired and the time during which they yield up their services. And it is only if we confine our attention to short-lived goods (such as foodstuffs, etc.) that we can safely assert that it makes no real difference in which of the two ways income in this second main sense is interpreted. (3) There remains "psychic" income. About this little need be said. It is the subjective side of commodity income in its immaterial sense--in that it consists of the utilities and satisfactions which are derived from the services of persons or material goods. And as such it is the end and goal of the whole consumer-producer nexus. But it plays no active part in the theory of value, at any rate once that theory has renounced the hope of establishing a quantitative correlation between exchange ratios and real pleasures and pains. And in what follows it will not be further discussed. 3. So far we have been concerned with the connotation of "income"; we have been examining the various planes of analysis on which it may be understood. We must now say something about its denotation. Not all the payments which are made to a man in his capacity as producer or factorowner are to be regarded as income payments in the strict sense. For some part of them may be required for the defraying of necessary incidental expenses. Thus a landlord or house-owner may have to spend (say) 20 per cent of the total annual rents due to him on repairs and renovations to the property he has leased out, and if so it is only the 80 per cent which is left after these expenses have been covered that he can use for the purposes of his private consumption. So too with incomes arising from the leasing or hiring of shorterlived goods: if their owner treats as income the total revenue which they yield him, he will find that after a few years the value of his property will fall to zero, and with it the income he has derived from it. If, therefore, he is (in the current phrase) to "keep his capital intact", he will reserve a part of his gross receipts in a depreciation fund with which he will be able to replace his equipment as it wears out. We must therefore distinguish between his "gross" and his "net" or pure income. And we can lay it down that so far as revenues derived from material property are concerned net income equals gross income minus the exact amount which must be laid aside in order to maintain the property itself at its existing value. In principle the concept of "pure income" so defined is perfectly clear and unambiguous; though of course it may be a matter of considerable difficulty in any given case to decide upon the precise amount which must be deducted from gross revenues in order to "keep capital intact". Let us note, however, that it is as such simply a matter of definition. We are entitled at any time to think of income in "gross" rather than in "net" terms if it suits our purposes better to do so. Thus an owner of land with valuable mineral deposits may count the total revenue which he draws from it as freely disposable income, even though it is an income which will come to an end when the deposits are exhausted. Net property incomes are, in fact, perpetual while gross property incomes are evanescent. But so long as we are aware of the distinction between them no harm need come from using the word in whichever sense is more appropriate to the subject under discussion. What, then, of incomes other than those derived from the leasing of material property? So far as interest on loans and other "pure" capital claims is concerned no problem arises. When I possess a claim against a person for (say) £1000 the interest he pays me is evidently a net income; for the duty of making allowances for depreciation, etc., is one which falls upon my debtor, not upon me. In the case of incomes from labour, on the other hand, a serious difficulty arises. In the first place, it is clear that of the total payments made to a worker a certain amount may have to be used in covering the "necessary expenses" which his work entails. Thus, if he is an intellectual or professional worker he must buy books or technical journals in order to keep himself abreast with current work in his subject; in other cases the nature of his work may be such as to require special clothes or personal equipment; he may be burdened with substantial travelling or entertainment costs; and so on. Expenditure of this type must evidently be deducted from his total wages before we can know what is his "net" income. But this is not all. That it is possible, if unusual, to treat labour power itself as a form of capital equipment. A man's energies and abilities are in the widest sense a part of his property or capital resources and the income he earns in respect of these can be regarded as a "rent" on this "personal capital". It follows by analogy with what we have just said that his wages can only be a "pure" income after allowances have been made for "keeping capital intact". But keeping personal capital intact involves two things; first, the maintenance of the labourer himself as a productive unit--that is to say, an adequate provision of the necessaries of life and of anything else that may be required for physical health and efficiency; and secondly, a "depreciation and replacement allowance" in the form of expenditure on the bringing up and training of new workers to take his place when his life as a producer is over. Money spent in these ways, it appears, is not a part of the labourer's net income; indeed, it is only when his gross receipts are sufficient to leave him a surplus after providing for his own and his family's immediate needs, and for any special expenses which his work may require, that he can be said to have a "net" income at all in the same sense in which, as we have just seen, most rents and all interest payments constitute net incomes. This argument may sound unreal and even fantastic. But it is not merely formally unassailable; it is capable of having great theoretical and practical importance. On the one hand, it is the basis of socialist theories of "exploitation"; since it shews that whatever may be said about the community's gross income, its net income is under existing conditions almost entirely concentrated in the hands of a few property owners and highly paid workers. And, on the other hand, it provides the rationale for the "personal allowances" and "exemption minima" which enter into any well-constructed income-tax system. Moreover, it is closely connected with one of the cost concepts --cost, namely, in the sense of the payments necessary to make production physically possible; for these payments are, precisely, the allowances which have to be made for maintaining intact the value of the community's capital and personal resources, and what is left after they have been covered is a "surplus"--i.e. a net income. Finally, what is perhaps of most immediate relevance here, it draws attention to the fact, which might otherwise be overlooked, that the normal use of the word "income" involves a sharp discrimination as between wages on the one hand and rent and interest on the other. In the former case it is regularly used of gross returns (except when deductions are made for the--relatively insignificant--"incidental expenses" of labour); in the latter case it usually if not invariably stands for net returns after provision has been made for keeping capital values intact. There is of course excellent ground for this discrimination so far as value theory is concerned. But we must recognise that it exists if we are to avoid confusion in the application of economic analysis to the wider problems of policy and welfare.   Home