Review of the Book
A Study of the Concept of National Income
by Roy M. Foulke
[Reprinted from the Henry George News, May,
"There are three and only three factors
utilized in the production of wealth, namely, land, labor and
capital. The production of all wealth thus naturally flows into
three streams as returns to land, labor and capital. Until an
attempt is made to translate this theory -- which is the
elementary theory of economics -- into mathematical facts (and
no attempt has been made to do so up to this time), we shall
have confusion in understanding the science of the production
and distribution of wealth) and that natural laws must exist in
this field as they exist in all other fields of science."
This is the thesis that Mr. Foulke expounds in this thought-provoking
monograph. Mr. Foulke, vice president of Dun & Bradstreet, Inc.,
is one of the country's outstanding analysts of corporate reports and,
in the accounting field, is a leader in the effort to improve
accounting practices to bring about more meaningful information on the
performance and financial status of corporations. His critique of the
concept of national income as it is used by some income analysts
deserves, therefore, our thoughtful consideration.
Mr. Foulke takes his stand with the classical theorists of economics.
In his view, economics is the science which seeks to discover the "laws
of nature" concerning the production and distribution of wealth.
Wealth is any material thing produced by man from the land or the
products of land, which has exchange value.
From this point of view he criticizes attempts to collect data on the
distribution of national income in the United States. The first
overall coordinated study, made by Dr. Charles B. Spahr in 1896, was
defective because Spahr set out to study "The Present
Distribution of Wealth . . ." but gave no definition or
explanation of what he meant by the term wealth, according to Mr.
Foulke. The pioneering study of the wealth and income of the people
made by Dr. Wilford I. King in 1915 pointed out that different
authorities defined wealth and income in different ways. It, too,
suffered from basic confusion but served to make clear the distinction
between individual wealth and national wealth. Studies of wealth over
the years have confused this important distinction, Mr. Foulke holds.
A parallel confusion existed, he reports, with respect to national
income as distinguished from individual income. The studies of Spahr,
Streightoff, King and Kuznets, which have been carried on currently by
the Department of Commerce, have achieved "with ever-increasing
refinements and thoroughness" valuable data on the aggregate
income of the people. But they have not yielded data on the
distribution of national income.
"The redefinement of national income to represent the net
production of national wealth, and gross national product to represent
the gross production of national wealth are conceptual changes which
would seem to be based on logic," Mr. Foulke argues. If, then, we
went on to estimate the contribution of each of the factors of
production to the net product, "for the first time in our
history, we would then know which part the first charge on the
production of wealth, namely imputed economic rent, fills in our
economics, and how the remaining wealth is divided between labor and
capital," he explains.
Mr. Foulke is, in effect, pleading with economists to return to
attempts to make a factorial analysis of the distribution of income
and wealth. Modern income analysis developed from the theoretical
interest of the nineteenth century economists in the distribution of
wealth. Only in the twentieth century did economists realize that
income is a fiow of goods, wealth a stock of goods.
Current measures of stocks of goods present difficulties with which
the statistical procedures of the time could not cope. Hence analysts
concentrated upon the distribution of income.
But factorial analysis of the distribution of income also presented
insuperable theoretical and practical difficulties. This led to the
development of present-day functional analysis. It has contributed
greatly to our economic knowledge. But the so-called laws of
economics, based on theoretical factorial analysis, could not be
described quantitatively through data derived from study of the
incomes distributed to the functionaries in production. This has
indeed been a great stumbling block in the development of economics as
an exact science of human behavior. Mr. Foulke has rendered a valuable
service in emphasizing this. It is to be hoped that he will go on to
show how, through present or more advanced accounting techniques, a
set of national income accounts can be computed which can be used to
analyze the distribution of income among the factors of production.
Analysis of the distribution of wealth is another matter. The
Conference on Research in Income and Wealth devoted a whole meeting to
the problem of measuring national wealth for the first time in 1948.
It took thirty-odd years of research to achieve our present methods
for estimating distribution of income. In a decade or two measures may
be developed which in the course of time will yield the data needed
for analysis of the distribution of wealth and wealth claims. The
conference at its outset addressed itself to the problem of the
definition of national wealth. The question is still an open one and
it is to be hoped that Mr. Foulke will take part in its solution.
Some adverse criticisms remain to be noted. In the interest of
simplifying his presentation, Mr. Foulke made it appear that he rested
his case upon classical economics. His definition of land, however ("The
whole universe except man and the things produced by man which have
exchange value"), is derived from a body of thought so modern
that it has not yet been incorporated into the body of economic theory
except in the writings of the most advanced economists. The definition
rests basically upon Henry George. For an adequate exposition of the
case for it one must turn to Dr. George Raymond Geiger's historic
work, The Theory of the Land Question.
In employing the phrase, "laws of nature," Mr. Foulke
raises a profound philosophical issue, one that is no more settled for
the physical sciences than it is for the social or human sciences. If
one must raise the issue in the present chaotic state of philosophy,
one should indicate how it is being interpreted. Otherwise it is left
It is to Mr. Foulke's credit that his study raises important
theoretical issues, such as where land in the sense of unimproved land
is to be categorized in a system of social accounts. Economics would
be the better for more thought-provoking criticism of this kind.