Pillars of Mainstream Macroeconomics Toppled

Pillars of Mainstream Macroeconomics Toppled, Says an Article Published in the July Issue of The American Journal of Economics and Sociology

AUBURN, Ala.--(BUSINESS WIRE)--July 28, 2004--Economics professor George Reisman has toppled a major pillar of mainstream macroeconomics. In the current issue of "The American Journal of Economics and Sociology" (July 2004, vol. 63, no. 3), in an article titled, "The Value of `Final Products' Counts Only Itself," Reisman refutes the claim that the value of final products (consumers' goods) counts the value of the intermediate products required in their production and the corollary claim that counting the value of intermediate products constitutes the error of "double counting."

Reisman shows that the fact that the value of a loaf of bread equals the value of the flour required to produce it plus the value added by the baker in its production, does not entitle one to forget the value added by the baker and view the value of the bread as counting simply the value of the flour. He shows that if one keeps in mind that what the value of the loaf of bread equals is the value of the flour plus the value added by the baker, then the value of the bread still counts nothing other than the value of the bread, not the value of the flour.

Reisman accuses contemporary macroeconomics of a double violation of the laws of mathematics: namely, arbitrarily ignoring parts of equations (such as the value added by the baker to the flour) and then adding up equations, or parts of equations, that, being alternative, mutually exclusive formulations of the same facts, are not properly subject to addition. Thus, while the value of a loaf of bread can be formulated alternatively as equal to the value of the loaf of bread, or to the value of the flour required to produce it plus the value added by the baker, or to the value of the wheat plus the values added by both the baker and the miller, it is still, in all three cases, always equal just to the value of the loaf of bread. The conclusion of contemporary economics that by means of these formulations the value of the loaf of bread counts not only its own value but also that of the flour and wheat requires first illegitimately ignoring the value added by the baker and the values added both by the baker and miller, and then adding up these three mutually exclusive equations (or what remains of them).

Reisman goes on to argue that since the value of final products counts only itself, the only way to include the value of the intermediate products is to go out and count them. Failure to do so, he claims, has made the contemporary concepts of gross domestic product (GDP) and gross national product (GNP) into concepts much closer to one of net product than gross product. He concludes with a presentation of his own view of a proper gross macroeconomic accounting aggregate, much larger than GDP/GNP, which he calls Gross National Revenue (GNR) and which is equal essentially to the sum of all business sales revenues plus wage and salary payments.

While the implications of Reisman's article are radical, especially for such matters as the respective roles of saving and consumption in spending and income formation, as far as pure aggregate economic accounting is concerned, his concept of Gross National Revenue can easily be related to the contemporary macroeconomic accounting aggregates. Subtracting aggregate business costs from sales revenues, for example, reduces GNR to National Income, i.e., essentially the sum of profits plus wages. Subtracting those same costs from the productive and consumption expenditures that constitute GNR reduces these expenditures to the sum of consumption expenditure plus net investment. Subtracting all such costs except depreciation cost reduces GNR to GDP/GNP and to consumption expenditure plus today's concept of gross investment. Where Reisman's approach is radical is that it implies that most spending in the economic system is concealed under the head of investment and is productive expenditure, not consumption expenditure, and depends on abstention from consumption, i.e., on saving.

Reisman, who is Professor of Economics at Pepperdine University's Graziadio School of Business and Management in Los Angeles and the author of "Capitalism: A Treatise on Economics" (Ottawa, Illinois: Jameson Books, 1996), says that acceptance of his approach would move economics sharply in the direction of the classical and Austrian schools and much further away from Keynes.

Click here to read Reisman's article in pdf format.

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