Capital Gains: Towards a Hicksian Definition of Income

Abstract

As shown in Chapter 7 national saving is the accounting record of national investment. So long as capital budgeting is followed consistently saving is always identical to investment, irrespective of how complicated the model or how many sectors it contains.

What we want in economics are theories which will be useful, practically useful. That means that they must be selective. But all selection is dangerous. So there is plenty of room for criticism, and for the filling in of gaps, building some sort of bridge between one selective theory and another. There is plenty of room for academic work doing that sort of a job.

Sir John Hicks, 1967

To measure income it is a necessary prerequisite to know what it is you wish to observe. Facts are not so clear cut as in the natural sciences; they are often wrong. To get them “right” for the purpose at hand and the time period, economists need theory. Theory helps to focus one’s attention, it helps one know where to look. It has a classificatory role. But this means the “facts” do not in the ordinary sense act as a check or test of the theory. Consistency of concepts is a necessary prior condition. The methodology is not that of econometrics but of an older craft: making sure that the facts are what the economists think they are. If it is income that you wish to measure, first work out what that income is. In the nature of things and because time passes there will never be a perfect set of “facts.”

Dieter Helm, 1984: 14

If we accept the Haig – Hicks – Simon concept of income as that which can be consumed while keeping real wealth intact, saving is the difference between this measure of income and actual consumption. Both income and saving will then include real capital gains. To preserve the saving – investment identity investment would also have to include these capital gains. … Inclusion of net revaluations in measures of income, product, and investment … entails a significant conceptual departure from conventional accounts, which focus on the direct output of current productive activity. … Different elements of revaluations have different implications for economic behavior. … If for many purposes it may be best to utilize measures that exclude revaluations, it may prove for many purposes, particularly where the focus is on the accumulation of capital, seriously distorting to ignore them.

Robert Eisner, 1989: 17–18

Saving should be defined by reference to the underlying concept of wealth to which the saving is an increment. … The most useful wealth concept is the market value of assets, not the cost-based measure of capital implied by the use of National income and product account (NIPA) saving.

David Bradford, 1991: 15–16