Numéraire
Volume the Ninth · of the table of twenty-six
The Quantities · Group II · № 09 · Sk

The Stock

a thing held, not a thing earned

The stock is wealth seen as a thing held rather than a thing earned, and the volume rests on the most fundamental distinction in economics and the most relentlessly confused: that between a stock and a flow. A stock is a quantity that exists at a moment — wealth, capital, debt, the money in circulation, the water standing in a tub; a flow is a quantity per unit of time — income, output, spending, the water through the tap and drain. The two differ in their very dimension and cannot be added or compared, yet public argument runs them together at every turn, mistaking a windfall for an income, a debt for a deficit, the money supply for spending. The volume opens with the distinction itself, and with Kenneth Boulding's charge that economics had committed the confusion in the large — building the whole subject on the income statement, the account of flows, while neglecting the balance sheet, the account of the standing stock of wealth. From there it builds two great accounts. Simon Kuznets created the flow account, the measure of national income that became gross domestic product, and warned that it gauges neither a nation's wealth nor its welfare, for a country may post a fine income while quietly consuming its capital. Raymond Goldsmith built the stock account to set beside it, the national balance sheet, the systematic reckoning of what a nation holds — its tangible wealth, and the dense web of financial claims that, being mutual debts, net to nothing for the nation even as they make up the wealth of its citizens. Franco Modigliani then descended to the single life, showing how a person turns a humped stream of income into a stock of wealth by saving in the working years and spending it down in retirement — wealth as a buffer, earned and meant to be consumed. Between the two accounts Morris Copeland ran a third, the flow of funds: the sector-by-sector record of who lends and who borrows, in which every surplus is matched by a deficit and each act of saving is followed to the claim it becomes, so that the money one cannot find in the spending is seen to settle, pass by pass, into the standing stock of claims. And the flagship carries the distinction to its limit. James Tobin saw the whole economy as a web of balance sheets and gave us the ratio, his q, by which the market's valuation of a stock of capital governs the flow of investment that builds it; and in his terms the volume answers the question the author set it: when does a fortune stop rewarding work and start being a position? A fortune rewards work while it is the stored and dwindling wage of labor; it becomes a position the moment its return — the flow it yields — comes to cover and then exceed what its holder consumes, so that the holding sustains and grows itself without any further work at all. With the stock, the quantities gain their master magnitude: the standing thing behind every flow, the held thing that all the earning and spending is finally for.

in print · № IX · 12 of 12 plates
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The argument of the volume

Begin with the distinction on which the whole volume turns. A stock is a quantity that exists at a moment in time — the wealth a person owns, 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 — the income earned over a year, the output produced, the spending that passes through the economy, the water running in through the tap and out through the drain. A stock changes only by the net of its flows, and a flow can only add to or drain some stock, yet the two are not the same kind of thing: they differ in dimension, as a distance differs from a speed, and cannot be added or compared. Kenneth Boulding charged that economics had committed this confusion at the grandest scale, building the subject on the income statement — the flow account of what is earned and produced and consumed — while relegating the balance sheet, the account of the standing stock of wealth, to the accountants. What a society truly is, in economic terms, is its stock: the whole accumulation of valued things that its flows exist to maintain and change. Put the stock at the center, and the economy appears as a reservoir through which a river runs.

From the reorientation follow two great accounts. Simon Kuznets built the flow account, measuring a nation's income with rigor for the first time and creating the figure, gross domestic product, that the whole world now watches; but he warned, more clearly than those who came after, that the measure is a flow and only a flow, recording the rate of production while saying nothing of the stock of wealth a nation holds, counting the bad with the good, and ignoring all the unpriced labor of the home, so that it can never stand as a gauge of welfare. Raymond Goldsmith built the stock account to set beside it — the national balance sheet, the systematic reckoning of what a nation owns: its tangible wealth of land and buildings and machines, and the layered web of financial claims that, being mutual debts, net to nothing for the nation as a whole even as they make up the wealth of the individuals within it. Franco Modigliani then carried the distinction into a single life, showing how a person turns a humped stream of income into a stock of wealth, saving in the high-earning middle years and drawing the store down in retirement — wealth as a buffer between a lumpy income and a steady standard of living, earned from labor and meant in the end to be spent. And between the income account and the balance sheet runs a third, the flow of funds that Morris Copeland constructed: the sector-by-sector record of who lends and who borrows, which follows each stream of saving out of the flow of income to its settling as a claim, and so traces the very motion by which the flows build the stocks.

The flagship carries the distinction to its limit. James Tobin saw the whole economy as a web of interlocking balance sheets, in which the prices the market sets upon asset stocks drive the flows of investment and activity; and he gave that vision a single ratio, his q — the market value of a stock of capital divided by the cost of replacing it — by which the valuation of the standing stock governs the flow of new investment that enlarges or starves it. The value of any stock of wealth, he showed, is the capitalized worth of the flows it will yield, so that stock and flow are two faces of one thing joined by the act of valuation. In these terms the volume's question is answered: a fortune rewards work while it remains the stored and dwindling wage of labor; it becomes a position the moment its return-flow comes to cover and then exceed the holder's consumption, so that the holding sustains and grows itself without further work, a permanent claim that rewards no labor because it requires none. With the stock joining the margin and the utility in print, the quantities gain their master magnitude — the standing thing behind every flow, the held thing that all the earning and spending was ever for.

The argument remains open. What follows is an attempt to fix its exact edges.

The twelve plates of this volume

  1. i The Bathtubin print Boulding; the stock-flow distinction itself — a stock is a level that exists at a moment, a flow a rate that runs through time — and the charge that economics, built on the income statement, neglected the balance sheet. Read the plate →
  2. ii The Hoardin print the oldest confusion, of money with wealth; the mercantilist faith that a nation's prosperity was the pile of gold in its vaults, and how slowly wealth came to mean more than a hoard. Read the plate →
  3. iii The Reckoningin print Kuznets; the flow account — national income, the measure that became gross domestic product — and its author's warning that it gauges neither a nation's wealth nor its welfare. Read the plate →
  4. iv The Balancein print Goldsmith; the stock account — the national balance sheet — and the dense web of financial claims that, being mutual debts, net to nothing for the nation even as they make up the wealth of its citizens. Read the plate →
  5. v The Lifetimein print Modigliani; the life cycle — how a person turns a humped income into a stock of wealth, saving in the middle years and spending it down in retirement; wealth as a buffer, earned and meant to be spent. Read the plate →
  6. vi The Circuitin print Copeland; the flow of funds — how money moves as both stock and flow across the sectors of an economy, every payment a flow that changes some balance, every balance a stock some flow has built. Read the plate →
  7. vii The Wearingin print depreciation; a stock decays without the maintenance a flow supplies, so gross investment must first make good the wearing-out before any of it counts as growth in the stock. Read the plate →
  8. viii The Holdingin print Tobin; the economy as a web of balance sheets, and the ratio q by which the market's valuation of a stock of capital governs the flow that builds it — and the answer to when a fortune becomes a position. Read the plate →
  9. ix The Debtin print the debt is a stock, the deficit a flow; a debt is the accumulation of past deficits, and to confuse the standing total owed with the yearly addition to it corrupts every argument about public finance. Read the plate →
  10. x The Annuityin print the conversion of stock into flow and back; a lump sum becomes a lifetime income, and an income capitalizes into a lump sum, the two joined and exchanged at the rate of interest. Read the plate →
  11. xi The Concentrationin print the stock is split far more unequally than the flow; wealth is concentrated where income is merely unequal, the gap widened by inheritance and by the returns that accrue to holding. Read the plate →
  12. xii The Inheritancein print wealth that outlives the one who made it; the stock passed down rather than earned afresh, the position that survives its maker, and the question of whose work a dynastic fortune rewards. Read the plate →

In closing

This volume took up the stock — wealth as a thing held rather than a thing earned, and the most fundamental distinction in economics, between a stock and a flow. Its subject was the standing magnitude behind the moving one: the level that exists at a moment against the rate that runs through time, the balance sheet against the income statement, the reservoir against the river. And the question the author set it was this: when does a fortune stop rewarding work and start being a position?

The volume built from a single distinction to the whole economy. Kenneth Boulding charged that economics had been written as an account of flows — income, output, spending — while neglecting the stock of wealth those flows exist to maintain, and urged that the subject be rebuilt on the balance sheet. Simon Kuznets created the flow account, the measure of national income that became gross domestic product, and warned that it gauges neither a nation's wealth nor its welfare. Raymond Goldsmith built the stock account to set beside it, the national balance sheet, and showed that the great web of financial claims, being mutual debts, nets to nothing for a nation even as it constitutes the wealth of its citizens. Franco Modigliani carried the distinction into a single life, showing how a person turns a humped income into a stock of wealth by saving in the working years and spending it down in retirement — wealth as a buffer, earned and meant to be spent. And between the two accounts Morris Copeland set a third, the flow of funds, the sector-by-sector reckoning of lending and borrowing in which every surplus is matched by a deficit, and each act of saving is followed to the claim it becomes — the motion by which the flows of income build, payment upon payment, the standing stock of wealth.

The flagship carried the distinction to its limit. James Tobin saw the whole economy as a web of interlocking balance sheets and gave us the ratio q, by which the market's valuation of a stock of capital governs the flow of investment that builds it; the value of any stock, he showed, is the capitalized worth of the flows it will yield, so that stock and flow are two faces of one thing. In his terms the question is answered: a fortune rewards work while it remains the stored and dwindling wage of labor, the buffer of the life cycle; it becomes a position the moment its return-flow comes to cover and then exceed the holder's consumption, so that the holding sustains and grows itself without any further work, a permanent claim that rewards no labor because it requires none. With the stock joining the margin and the utility in print, the quantities stand three volumes deep; and the table gains its master magnitude — the standing thing behind every flow, the held thing that all the earning and spending was ever for.

The volume separated the stock from the flow and watched a fortune cross from one kind of wealth to another — from the stored wage of labor, earned and spent, to the self-sustaining position that lives upon its own yield. But in drawing that line it raised a question it did not settle. When a holding grows large enough to maintain itself, its return — the interest, the rent, the dividend — is a flow that reaches its holder for no further work at all; and one may ask what, if anything, that flow rewards. Is the return to a pure position the price of some service the holder still renders, the patience of deferred consumption or the bearing of risk, as its defenders hold — or is it, as its critics charge, a claim levied upon the work of others, a toll collected by the mere fact of ownership? The stock can be measured and the position marked; whether the position is earned is a question of justice the accounting cannot reach, and the volumes of the rent and the share take it up.