In Aggregate Economic Accounting Most Spending Is Not Consumption but Is Concealed under Net Investment

Attention: all economics students. Perhaps the most prominent equation in macroeconomics is that national income (essentially the sum of profits and wages) equals net national product, which is the sum of consumption plus net investment.

Because consumption is much larger that net investment, it is almost universally assumed that it pays the bulk of national income. However, most spending in the economic system is actually not consumption. RATHER, IT IS CONCEALED UNDER NET INVESTMENT.

Net investment is the difference between two enormous sums: a minuend consisting of the total of business spending for capital goods and labor, and a subtrahend consisting of the costs that are deducted from sales revenues in calculating profits.

The minuend contains additions to asset accounts (plant and equipment and inventory and work in progress) while the subtrahend contains subtractions from asset accounts, notably depreciation and cost of goods sold. Selling, general, and administrative expenses appear equally in both the minuend and the subtrahend.

The difference between additions to and subtractions from asset accounts is the net change in those accounts, i.e., net investment.

The minuend in calculating net investment is where the bulk of spending in the economic system lies. I call this spending “productive expenditure.”

The concept of productive expenditure is not recognized in contemporary economics. It is believed that it is somehow included in consumption expenditure and that to recognize it separately would constitute the error of “double counting.”

For further elaboration and proof, including a thorough discussion of the issue of “double counting,” see Chapter 15 of my Capitalism: A Treatise on Economics. It’s available at https://amzn.to/2PM19ut

Read this chapter, tell your economics professors about it, and ask them to show you what’s wrong with my claim that most spending takes place under the head of net investment.