The Bathtub — The Stock, Plate i

The volume's subject is the stock — wealth as a thing held rather than a thing earned — and the distinction, the most fundamental in all of economics and the most relentlessly violated, between a stock and a flow. Nearly every muddle in public argument about money, wealth, and debt is at bottom a confusion of the two; nearly every clear thought about them begins by keeping them apart. So begin with the distinction itself, in its plainest form, and with the economist who insisted that the whole subject had been built on the wrong half of it. Kenneth Boulding argued that economics had written itself as an account of flows — income, output, the stream of production and consumption — and had neglected the stocks, the standing structure of wealth and capital that all that flowing exists to maintain and change. To put the stock back at the center is to see the economy as it is: not a river only, but a reservoir through which the river runs.

A stock is a quantity that exists at a moment in time, a level: the wealth a person owns on the last day of the year, the capital a firm has installed, the money in circulation, the debt a nation owes, the water standing in a bathtub. A flow is a quantity per unit of time, a rate: the income a person earns over the year, the output a firm produces, the spending that passes through the economy, the water running in through the tap and out through the drain. The two are bound together — a stock changes only by the net of its flows, and a flow can only add to or drain from some stock — but they are not the same kind of thing, and they cannot be added together or compared as if they were. To ask whether a person's wealth is larger than his income is to ask a question with no answer, for the one is measured in dollars and the other in dollars per year; they have different dimensions, as a distance differs from a speed. The bathtub holds the whole matter: the level in the tub is the stock, the tap and the drain are the flows, and the level rises or falls only by the difference between them.¹

1. A stock exists at a moment (a level): wealth owned, capital installed, money in circulation, debt owed, water in a tub. A flow is per unit of time (a rate): income earned, output produced, spending, water through the tap and drain. A stock changes only by the net of its flows; a flow adds to or drains some stock. But they differ in DIMENSION — dollars versus dollars per year, as distance differs from speed — and cannot be added or compared. The bathtub holds it: the level is the stock, the tap and drain the flows, the level moving only by their difference.

From this small distinction enormous confusions grow, because the language of everyday economic talk runs the two together at every turn. A windfall — a lottery prize, a one-time sale, an inheritance — is a change in a stock, a sudden addition to wealth; treated as though it were income, an ongoing flow, it leads a person to spend as if it would recur, and ruin follows. A nation's debt is a stock, the accumulated total it owes; its deficit is a flow, the amount it adds to that stock each year; commentators who speak of "the debt" when they mean the deficit, or who imagine that a falling deficit means a falling debt, reason about a level as though it were a rate, and mislead. The money supply is a stock; spending is a flow; and the relation between them — how fast the stock turns over to generate the flow — is a question that cannot even be posed without keeping the two distinct. In each case the error is the same: a level mistaken for a rate, or a rate for a level, the reservoir confused with the river.²

2. The confusions are everywhere. A windfall (prize, sale, inheritance) is a stock change; treated as income, a recurring flow, it invites ruinous spending. A nation's debt is a stock (the accumulated total owed); its deficit a flow (the yearly addition); to say "the debt" for the deficit, or to think a falling deficit means a falling debt, is to mistake a level for a rate. The money supply is a stock, spending a flow, their relation a turnover. In each case: a level taken for a rate or the reverse, the reservoir confused with the river.

⁂

Boulding's complaint, set down in his 1950 reconstruction of the subject, was that economics itself had committed a grand version of this error. The discipline had organized itself around the INCOME STATEMENT — the flow account that records what is earned, produced, and consumed over a period — and had relegated the BALANCE SHEET, the stock account that records what is owned and owed at a moment, to the accountants and the bankers. National income, output, consumption, investment: these flows were the magnitudes economics measured and theorized. But the flows, Boulding argued, are secondary. What truly exists, what a society truly is in economic terms, is its STOCK: the whole heterogeneous accumulation of valued things — the houses, the machines, the roads, the inventories, the knowledge, even the trained capacities of its people — that stands at any moment as its wealth. Production and consumption are merely the addition to and subtraction from this stock; income is merely the rate at which the stock is replenished. To study the flows while ignoring the stock is to watch the traffic and never ask what the city is made of.³

3. Boulding's 1950 complaint: economics had organized itself around the INCOME STATEMENT (the flow account — earned, produced, consumed) and relegated the BALANCE SHEET (the stock account — owned and owed) to accountants. But the flows are secondary. What a society truly IS, economically, is its STOCK: the whole heterogeneous accumulation of valued things — houses, machines, roads, inventories, knowledge, trained capacities. Production and consumption merely add to and subtract from it; income is merely the rate of replenishment. To study flows while ignoring the stock is to watch the traffic and never ask what the city is made of.

He proposed, accordingly, to rebuild economics on the balance sheet. The fundamental fact about an economic agent, in his view, was not its income but its NET WORTH — the total value of what it owns minus what it owes — and the fundamental economic activity was not earning and spending but the maintenance and transformation of this stock of net worth. A household, a firm, a nation could be understood as a balance sheet evolving through time, its assets and liabilities shifting as it produced, consumed, saved, borrowed, and lent. Saving, in this light, was not merely income unspent; it was the act of adding to net worth, of enlarging the stock. Consumption was not merely the using-up of output; it was the depletion of a stock by wear and use. Even production was the conversion of one stock into another — raw materials and labor-time into finished goods. The whole restless motion of the economy was, underneath, the slow change of a vast standing structure, and the structure, not the motion, was the thing.⁴

4. Boulding's remedy: rebuild economics on the balance sheet. The fundamental fact about an agent is its NET WORTH (what it owns minus what it owes), and the fundamental activity is the maintenance and transformation of that stock. A household, firm, or nation is a balance sheet evolving in time. Saving is not income unspent but an addition to net worth; consumption is the depletion of a stock by wear and use; production is the conversion of one stock into another. The economy's restless motion is, underneath, the slow change of a standing structure — and the structure, not the motion, is the thing.

This reorientation is the charter of the volume, and the plates that follow trace its consequences. If the stock is the thing, then economics needs two great accounts, not one: a measure of the flow and a measure of the stock. The next plate turns to the flow account — to the invention of national income and the measure of output that the whole world now watches, and to the warning, issued by its own author, that it counts the motion and not the wealth. The plate after sets beside it the stock account, the national balance sheet, the reckoning of what a nation actually holds. Then the volume descends to the individual, to see how a person builds a stock of wealth out of a stream of income across a lifetime; and it rises at last to the question of valuation and of position — of what a stock of wealth is worth, and of when a fortune ceases to be the wage of work and becomes a standing claim. But the foundation is the one Boulding laid: that beneath every flow lies a stock, and that to understand the economy one must look first to the reservoir, and only then to the river. The next plate is the reckoning.⁵

5. The reorientation is the volume's charter. If the stock is the thing, economics needs two accounts: a measure of the flow and a measure of the stock. The next plate turns to the flow account (national income, the output measure the world watches, and its author's warning that it counts motion not wealth); the plate after sets beside it the stock account (the national balance sheet); then the volume descends to the individual building a stock from a stream of income, and rises to valuation and position — what a stock is worth, and when a fortune stops being the wage of work. Next: the reckoning.

The volume opens, then, on the most basic and most neglected distinction in economics. A stock is a level that exists at a moment — wealth, capital, debt, the standing accumulation of valued things; a flow is a rate that runs through time — income, output, spending, the motion that adds to and drains from the stock. They are different in kind and cannot be added or confused, yet public argument confuses them ceaselessly, mistaking windfalls for income, debt for deficit, the money supply for spending. Kenneth Boulding's deeper charge was that economics itself had made the error in the large, building the subject on the flow account of income and output while neglecting the stock account of wealth — the balance sheet, the net worth, the standing structure that all the flowing exists to maintain. Put the stock back at the center, and the economy appears as a reservoir through which a river runs, the river only the changing of the reservoir. The next plate is the reckoning.