George Reisman on National Income Accounting: A Correction

Once in a while a fundamental misunderstanding gets into print. Sometimes it takes a considerable amount of effort and tons of ink and paper to correct the mistake. Sometimes the correction never gets made. In the case of George Reisman's (2004) fundamental misreading of modern macroeconomists' definition of the gross domestic product (GDP) or gross national product (GNP), it should be easy to correct it quickly. Reisman's problem is that he attributes his own confusion to others and then tries to correct them. He does not correctly distinguish between intermediate goods and factors of production, and he also does not correctly recognize how macroeconomists derive the net domestic or national product from the gross product. Finally, his concept of gross national revenue is grossly mistaken. If Reisman has impressed upon students his profound misreading of the process of national income accounting, this journal owes them an early opportunity to clear their minds of the confusion. Reisman charges that "the accusation of 'double counting' should actually be directed at the prevailing conviction that the value of the final product counts not only itself but also the value of the intermediate products that have contributed to its production" (2004: 615q516). National income accountants don't say that the value of the final product counts itself plus the value of intermediate products. None of the nine quotations he cites (2004: 610-611) should be interpreted as he does. What is stated in national income accounting is that the value of the final product already includes or covers the value of the intermediate goods. Using Reisman's own example of a loaf of bread that sells for $6, having been produced with flour costing $5, and the latter having been derived from wheat costing $3, what macroeconomists say is that the $6 value of the bread covers the cost of the flour. Furthermore, the cost of flour covers the cost of wheat. That is why one does not have to add the cost or value of wheat to that of flour and then to the value of bread in order to correctly estimate national income or product. From the value-added approach to national income accounting, we would obtain the $6 by adding the $3 from the farmer's effort, $2 from the miller's effort, and $1 from the baker's effort or production. The values added in the process of creating bread by the farmer, the miller, and the baker also constitute the net incomes of those enterprises--wheat farming ($3), flour milling ($2), and bread baking ($1). Now, if to obtain Reisman's allegedly correct measure of gross domestic product one added all these incomes to the value of the bread ($6), there would be more domestic or national income than producers actually received. It is to avoid this embarrassing overestimation that national income accounting instructs that one may use either the value-added approach or the expenditure approach, but to be careful to add only the expenditures on final demand or end use in the latter approach, and not to include intermediate goods. It is totally mistaken to be worrying about factor costs--wages of labor, rent of land or equipment, interest on borrowed capital (funds or savings), profits to entrepreneurship--in the above attempts at national income accounting as Reisman appears to be doing (see his note 16). At the various stages of producing the bread, the net incomes (revenues) received are distributed into wages, rents, interest, and profits (or losses) to the respective factors engaged in the production process. This understanding should make it abundantly clear how wrong Reisman is in his attempt to add the value of wages to "business sales revenues" in order to obtain his so-called gross national revenue (GNR) (2004: 619). It is from sales revenues that wages are (ultimately) paid. It makes no good sense to add production costs to sales revenues in order to estimate national income or product. Indeed, a third approach to national income accounting is to add all factor incomes--wages, interest, rentals, and profits. …