Knowledge that Transforms

THE purpose of this paper is to examine two of the major issues at stake between Professor Kuznets and the Department of Commerce: (i) the way of netting the income totals when governmental output is included, and (2) the significance of distinguishing between a national income total valued at market prices and the same composite valued at factor cost. The nature of these issues may best be revealed, we believe, if the same data are used to illustrate the various concepts. Hence we shall employ Department of Commerce data to estimate the Kuznets concept presented in National Income and Its Composition, I9I9-I938. This concept has subsequently been revised, but to derive the wartime revisions from Department of Commerce data would necessitate arbitrary assumptions without any further clarification of the issues at stake,' while the specific quantitative form of Kuznets' most recent revision has not yet been indicated.2 In section I we compare, on the basis of Department of Commerce data for I939, Kuznets' concept of national income with that of the Department of Commercefirst at the final products level, then at the factor costs level. Section II presents our conclusions on the basic issues involved.

A BUNDANT supplies of all forms of energy are to be found in the United States: in addition to huge coal resources, the country possesses large reserves of crude oil and natural gas as well as plentiful water power. These sources of energy are not, of course, distributed equally over the country and, therefore, the distances between the localities in which each type of fuel is produced and the areas in which it is consumed differ very widely. On that account prices at which primary and, consequently, also secondary types of energy (e.g., coke, manufactured gas, and electricity generated in thermal power plants) can be supplied, as well as the relative prices of the different fuels themselves, vary from place to place. Electricity is generated practically all over the country. In addition to electricity, consumers generally have a choice among solid, liquid, and gaseous types of fuel. Whenever the nature of a production process does not make it imperative to use a particular type of fuel, the decision as to which form of energy will be utilized by an industry will depend partly on its relative cheapness. For present purposes it has been assumed, however, that mechanical processes generally call for the use of electricity. In heating processes, the number of possibilities is reduced accordingly as higher temperatures are required. For instance, a temperature exceeding 3s500F can only be attained by aid of electricity. Nevertheless that does not mean that all such industries are solely dependent on electricity. The requisite electric current need not necessarily be obtained from the grid, but might be generated by plant on the premises. The I947 Census of Manufactures shows that several of these industries do in fact purchase other fuels in order to produce electricity themselves. Furthermore, it should be borne in mind that all forms of energy are suitable for heating factory buildings. By utilizing the data derived from the aforesaid 1947 Census of Manufactures an attempt is here made to compare the elasticity of substitution of gas with respect to solid fuels (coal and coke), liquid fuel (fuel oil), and electricity.

Unpublished data supplied in correspondence by the Department of Commerce. Nontax payments and motor vehicle licenses are published in National Income, I95I edition, p. I54. These nontax and miscellaneous tax items have been allocated to our three income shares in proportion to the occupational distribution of the population to obtain an alternative concept of disposable income adding up to the estimates of the total published by the Department of Commerce. The occupational distribution of the population among employees, farm operators, and proprietors was estimated from the I930 and I940 Census tabulations. Intervening years are interpolated from these benchmarks so as to have the same year-to-year percentage changes as the estimates by the Department of Commerce of full-time employees, farm operators, and proprietors. See National Income, I95I edition, pp. i8o-8i, I86-87.

THE treatment of institutions remains one of the most unsatisfactory areas in national income accounting. Standing at the end of a long process of evolution in both concepts and methods, the recognized experts in the field are still compelled to admit that their procedures, best exemplified today by those of the United States Department of Commerce, remain open to much basic criticism.' This paper proposes to reformulate the current treatment of bank income, including a reopening of the discussion of financial intermediaries in their role as contributors to the national income and product. It is believed that the methodology suggested here is simpler, more in accord with reality, theoretically sounder, and of greater analytical value in deriving series of bank income and, ultimately, of productivity estimates. In the beginning of this study, the concepts proposed and those now in use by the Department of Commerce will be described.2 As a second step, the two opposing methods will be examined for their underlying rationale and philosophy. Third, technical procedures will be compared by means of simplified accounting models. Fourth, a number of refinements and qualifications both of principle and technique will be introduced, which are important in facilitating the passage from didactic framework to the final statistical series of income and product originating in banking. These series, if they are to be useful, must be capable of being integrated into the total national accounts. How this can be done will be demonstrated at various points along the way. I