GDP is, then, a measure of new value created during the year, and equal to the total of incomes, or National Income. It is also a measure of consumption spending and net investment. But, it is not a measure of total output value, because it does not include the value of means of production (constant capital) consumed in production. This constant capital is not equal to the value of intermediate production, whose value is comprised entirely of revenue, being equal to the value of revenues from Department I, used for consumption.
A portion of total output, including a portion of intermediate production, constitutes net investment, but this investment is funded from savings, which is merely that portion of revenue not consumed, but which goes to fund capital accumulation. The largest fund for this comes from profits, but in a modern economy, a part comes from pooled savings of all classes. These savings and investment should not be confused with speculation in financial and property markets, in the purchase of shares, bonds, property and their derivatives. To the extent, that money remains in this sector, in an endless merry-go-round of constantly rising asset prices, the money is withdrawn from the real economy, and from its potential use to finance either consumption, or capital accumulation. The speculation should be seen as just another form of consumption, just like money spent in a casino.
The net investment is a function of National Income, because it is funded from saving, which is a function of National Income, and the marginal propensity to consume. However, savings may be hoarded. Marx and Engels describe how, older societies tend to have larger pools of savings, because past profits may not all be used for capital accumulation or consumption. In times when the demand for capital rises, because the economy is growing, these unused savings can be mobilised to finance the expansion. Investment, in any year, therefore, may occur, even if current savings are zero or negative. The constraint, here, is that there are available unused resources that can be employed as part of this process of capital accumulation, and this investment must lead to an increase in value circulating in the economy, in a relatively short time. Otherwise, the mobilisation of these savings simply leads to rising demand for resources that are not available in sufficient supply causing a rise in their market prices, and a squeeze on profits. This provision of additional savings to fund the demand for money-capital should not be confused with the increase in money supply itself, which simply results in a depreciation of the currency, unless it quickly provokes an equal expansion of output.
The expansion of the economy, as a result of net investment, means that in the following year, an increased quantity of means of production are thrown into circulation, and their value is transmuted into the output of the following year. They are the product of new labour in Year 1, and their equivalent was revenue produced by that labour in Year 1, but which is saved, i.e. revenue converted to capital. They are bought out of revenue, in Year I, revenue that is not consumed. But, in Year 2, they already exist, they form part of the productive-capital consumed in Year 2. Their value is simply transmuted into the total output value of Year 2. They provide a revenue for no one in Year 2. Nor are they bought out of revenue in Year 2, being replaced, in kind, out of Year 2 production. In Year 2, they are bought out of capital, not out of revenue. Their value, therefore, in Year 2, appears nowhere in the national accounts, as either income, nor expenditure, nor output value (including output value of intermediate production). And, what applies in Year 2, applies, in Year 3, 4 etc., because, having become a part of the capital of society, they transfer their value, year after year, to national output, in the same way, forming a revenue for no one, in each of these subsequent years. Indeed, because of capital accumulation, and because of rising social productivity, manifest in a rising technical and, thereby, organic composition of capital, this portion of national output grows year after year, relative to GDP, and to revenues and the consumption fund.
The false idea that GDP is a measure of total national output flows from the adoption of Say's Law, by orthodox economics in both its neoclassical and Keynesian variants. Keynes merely tweaks it to include net investment and savings. But, this whole fallacy, including Say's Law, stems from the acceptance of Smith's “absurd dogma” that the value of total output resolves entirely into revenues, i.e. into v + s, rather than into c + v + s.
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