Economic theory excerpt on macroeconomic accounting identities

Where Keynes and Kuznets and macroeconomic tradition have been right is in reasoning that pay and gross profit, meaning gross of depreciation, sum to the “expenditure” spent on consumption and gross investment. This fact of arithmetic is the logic behind Say’s law: pay plus profit are always enough to buy what is produced. We saw that this truism gives cold comfort when calamity or misjudgment make profit negative, as with the subprime houses of 2008. What it certifies, anyhow, is expenditure = pay + gross profit = consumption + gross investment. (6.21) We can subtract depreciation to reach pay + profit = consumption + investment. (6.22) Now (6.19) can be corrected as a whole to show income = pay + profit + self-invested work - human depreciation = output = consumption - investment + self-invested work — human depreciation. (6.23) My main goal in this book has been to further the work of Solow in exogenizing growth, and also the work of Ben-Porath in endogenizing human capital as something produced within the economy. It was in that spirit that I derived the Y rule in Chapters 2 and 5 by putting human capital inside. I reached output = investment + human capital growth + cash flow. Here “ex post net” is understood before output and investment, so that investment means physical capital growth. (6.16) applies the growth truism to human capital. The cash flow truism shows that cash flow is net transfer plus exhaust realized in Chapter 6: Parallels with the Firm 2/4/16 23 HOUSE_OVERSIGHT_011057