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National Income and Welfare

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NATIONAL INCOME AND WELFARE by Simon Kuznets Do estimates of national income measure the net contribution of economic activity to its primary goal—provision of goods to individuals— without errors of commission and omission? Do all commodities and services ordinarily included contribute to the satisfaction of consumers' wants, present or future? Are all the goods, i.e., all the sources of satisfying consumers' wants, made available in any year included in national income as estimated in this country today? We consider first the possible errors of commission, then those of omission.

Things desirable in the eyes of one individual may be matters of indifference to the group of which he is a member, or even considered deleterious by many; and things wanted by the majority may be frowned upon by the minority. In determining what are goods from the viewpoint of satisfying consumers' wants, we cannot assign both positive and negative signs to those wanted by some but deemed pernicious by others, then strike algebraic balances. Rather we must decide what, on the whole, are goods and should be included. In the statistical measurement of national income the question reduces itself to what commodities and services should be excluded because, by and large, they do not contribute to the goal of economic activity—satisfaction of consumers' wants. Specific examples may range from services, such as are rendered Mr. Smith by a professional gang of killers in disposing of his rival Mr. Jones, to commodities, such as harmful drugs or useless patent medicines.

• • • • • We exclude all illegal commodities or services, e.g., hired murder and the manufacture and sale of illegal drugs, as far as we can with the inadequate statistical data at hand. We include commodities and services not prohibited as long as they find a buyer (presumably they would not exist without one), though they may not be useful from any objective standpoint. In short, in the absence of society's explicit declaration to the contrary, the wants of the individual buyer are the criterion. Erratic the test of legality may be (consider the prohibition years) and difficult of application to certain activities (consider a shady business deal that has not as yet been prosecuted in courts and may never be), but it is the only one at the disposal of a national income estimator unless he sets himself up as a social philosopher and decides to ignore the consensus of society as to what are not goods, i.e., not positive contributions to the ap

proved ends of economic activity.

There are of course numerous payments and transactions that do not represent a commodity produced or a service rendered: and whenever national income is estimated from payments (rather than from the value of commodities and services), such transfers also are omitted; e.g., gambling gains, net gains on sales of capital assets without any preceding input of resources to account for the gain, and gifts. All these transfers among individuals may greatly affect the eventual shares various members of society receive of the current net product; but they do not directly determine its size, if it is defined as the net value of commodities and services produced during the year. The distinction between transfer payments and payments that are evidence of real production is scarcely so simple, but this is another of those problems we can no more than mention.

Judged in the light of all possible ways of satisfying consumers' wants, national income as customarily measured is subject to larger errors of omission than of commission. Errors of omission arise, first, from the deliberate restriction of national income to the net product of economic activity proper, and hence the deliberate exclusion of activities that may satisfy wants but are not economic. Even within the area of economic activities proper, especially if broadly defined, national income estimates omit some types of product. Finally, by definition, they neglect completely any consideration of such costs of economic activity as impinge directly upon consumers' satisfaction or the welfare of the community.

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