<p>I will only answer the last question because without further qualification the first two questions do not seem to make sense (see the my comment).  Also to make everything cleaner I will use <span class="math-container">$w$</span> for wages, <span class="math-container">$\pi$</span> for profits, <span class="math-container">$Y$</span> for output, <span class="math-container">$C$</span> for consumption and <span class="math-container">$I$</span> for capital spending.</p>
<blockquote>
<p>Do these identities hold?</p>
</blockquote>
<p><span class="math-container">$$w= C \\ \pi = I$$</span></p>
<p>No. There is nothing in your system above that would suggest the above should hold. As you remarked on by definition:</p>
<p><span class="math-container">$$\pi +w = Y = C+ I \implies \pi + w =C + I$$</span></p>
<p>Given the above the profits are actually equal:</p>
<p><span class="math-container">$$\pi = C + I -w \text{ or  } \pi = Y -w $$</span></p>
<p>and wages are equal to</p>
<p><span class="math-container">$$w = C + I - \pi \text{ or } w = Y - \pi $$</span></p>
<p>The reason why the two identities (<span class="math-container">$w=C$</span> and <span class="math-container">$\pi =I$</span>) won't hold might be best visualized by some practical example. Let us assume some overtly simplistic production function where <span class="math-container">$Y = L + K$</span>, here marginal product of labor and capital are both <span class="math-container">$1$</span> so wage <em>per</em> unit of labor will be <span class="math-container">$1$</span> and return on capital also <span class="math-container">$1$</span>.</p>
<p>Now, I am not sure if this was your question about 'prices' but note we do not need to necessarily need to use some real world currencies here and this prices could be denoted in apples, bananas etc  (as commonly done in theoretical models - especially in international economics - see Feenstra Advanced international trade for some examples) but I will leave the units vague for simplicity.  In addition note that GDP as a statistical measure - not as a concept of output - just look at production sold at market so that would in Robinson Crusoe economy be zero because there are no market transactions - but I assume here you are interested in the underlaying concept of output rather than statistical measure.</p>
<p>The above out of the way, let us assume that Robinson Crusoe starts 10 units of labor that he gets every time period, that he can invest in capital goods which cost exactly 1 unit of output and let see some example of <span class="math-container">$Y$</span> calculation across 2 different periods.</p>
<p>Period 1: Since there is no capital here output is produced with labor, as discussed above the price of labor is 1 so when 10 units of labor are supplied we get that <span class="math-container">$w=1(10)=10$</span>,  So we have <span class="math-container">$Y=w+\pi = Y=10+0$</span>, now this by definition has to be equal to all spending but there is no reason why we should assume spending on consumption has to be equal to 10. That is one possibility but any combination of <span class="math-container">$C+I=10$</span> would work here. Let us assume that <span class="math-container">$C=5$</span> and <span class="math-container">$I =5$</span>.</p>
<p>Period 2: By our assumption that it costs <span class="math-container">$1$</span> to acquire <span class="math-container">$1K$</span> now the Crusoe has <span class="math-container">$10L, 5K$</span>. Given that the profit (under which you decided to put returns on capital) are given by <span class="math-container">$\pi = (1)5$</span>, and wages are <span class="math-container">$w=(1)10$</span> so now output is equal to <span class="math-container">$Y= 5+10 =15$</span>. As previously consumption and investment has to be equal <span class="math-container">$15$</span> <em>together</em> but there are various ways how you can achieve that. <span class="math-container">$C$</span> could be 5, which would mean <span class="math-container">$I=10$</span> or <span class="math-container">$C=15$</span> which would mean <span class="math-container">$I=0$</span>, as long as <span class="math-container">$C + I =15$</span> any value for <span class="math-container">$C$</span> or <span class="math-container">$I$</span> that satisfies the equality will work.</p>
<p>Hence, generally <span class="math-container">$w\neq C, \pi \neq I$</span> save for special cases where <span class="math-container">$C$</span> and <span class="math-container">$I$</span> are choose by Robinson Crusoe to be exactly equal that amount.</p>

CC BY-SA 4.0
2020-12-22T18:51:13.613Z
2020-12-22T23:10:37.447Z
2020-12-22T23:10:37.447Z
1muflon1
<p>I am trying to isolate a simple model for GDP accounting in the one person economy also known as the Crusoe economy. Because Crusoe lives alone and has dominion (exclusive control) over all items of economic value I assume he assigns zero value for rent as the return on land and extraction of raw materials. This means income is attributed to wages and profit. Also I assume Crusoe invests only in capital and holds zero inventory in the firm or business sector of his economy. He counts all other output as transfers to consumption in the household sector.</p>
<p>In terms of economic value instead of prices I want to know if wages and profit have a mathematical description in terms of respective contributions to total output?</p>
<ol>
<li>Identity for Gross Domestic Product</li>
</ol>
<blockquote>
<p>Output = Income = Expenditure</p>
</blockquote>
<ol start="2">
<li>Classical factors of production</li>
</ol>
<blockquote>
<p>land, labor, and capital</p>
</blockquote>
<ol start="3">
<li>Classical factor payments</li>
</ol>
<blockquote>
<p>rent, wages, and profit</p>
</blockquote>
<ol start="4">
<li>Income in the circular flow assuming zero rent</li>
</ol>
<blockquote>
<p>income = wages + profit</p>
</blockquote>
<ol start="5">
<li>Expenditure in the circular flow assuming zero inventory</li>
</ol>
<blockquote>
<p>expenditure = capital + consumption</p>
</blockquote>
<ol start="6">
<li>Robinson Crusoe GDP identity with simplifying assumptions:</li>
</ol>
<blockquote>
<p>output = capital + consumption = wages + profit</p>
</blockquote>
<p>Questions:</p>
<blockquote>
<p>Is there a non-price equation for wages in terms of output and profit?</p>
</blockquote>
<blockquote>
<p>Is there a non-price equation for profit in terms of output and wages?</p>
</blockquote>
<p>Do these identities hold?</p>
<blockquote>
<p>wages = consumption?</p>
</blockquote>
<blockquote>
<p>profit = capital?</p>
</blockquote>

CC BY-SA 4.0
2020-12-22T17:09:52.013Z
What does "economic value instead of prices" mean?
Michael Greinecker
CC BY-SA 4.0
2020-12-22T17:50:10.400Z
what do you even mean by non-price? By definition wage **is the price for labor**, also return on capital - from which profit here consist of **is the price for capital**. If you dont want prices (and by prices I mean at least relative prices, you dont need prices in some currency) you need to get rid  of both wages and profit
1muflon1
CC BY-SA 4.0
2020-12-22T23:54:46.823Z
So my question perhaps would be better stated as follows: can income as wages and profit be defined in terms of economic value independent of price? The answer seems to be no. The GDP output does have economic value independent of price. The economic value is used up in consumption in the household sector. Crusoe should think of his income as the flow of economic value to his household and should think of labor as the cost of producing his income. Crusoe does not profit from capital he uses it to generate his actual income as household consumption.
SystemTheory
CC BY-SA 4.0
2020-12-23T00:00:16.953Z
You can convert wages, profits etc into utility but for that you need to specify additional utility function and the relation would no longer be GDP which you said you are interested at the beginning. Also, the wage=consumption and profit=capital does not hold in the system above generally - even if we would apply some utility function to it it would not hold. For that you need to change the system above somehow.
1muflon1
CC BY-SA 4.0
2020-12-23T00:05:23.120Z
Thank you I think Hyman Minsky makes arguments that profits equal investment spending under heroic assumptions using an identity called the Kalecki-Levy profit identity. However I think you are right that wages and profit are not meaningful in terms of economic value. If one goes away from a pricing system the GDP identities do not hold anymore and I don't think Crusoe would use a pricing system unless he got bored and was educated as an economist. One might imply his use of prices or some ratio of preference when he decides how to allocate labor to a mix of capital and consumption goods.
SystemTheory
CC BY-SA 4.0
2020-12-23T00:22:52.887Z
@SystemTheory except what you are saying is not correct. If you just google  Kalecki-Levy profit identity you will find that the profit identity in GDP consist of two terms investment and capitalist consumption so it is not profits equal investment but $\pi=C_p +I$ where $C_p$ would be capitalist consumption- now you can actually eliminate $C_p$ from the system with bunch of assumptions (which make system no longer an identity) but you will not get nice $\pi =I$ but only $\pi=f(I)$, so   profits are not equal to investment. You can say they are function of investment but that is not identity.
1muflon1
CC BY-SA 4.0
2020-12-23T00:40:01.153Z
@1muflon1 As stated Minsky makes what he calls "heroic assumptions" on the Kalecki-Levy profit equation to argue that profit equals investment expenditure as a first case approximation. I think he assumes that workers do not save or invest out of wages they only spend for current consumption. And he assumes firms do not consume out of profit they only invest retained earnings. I am trying to isolate economic value of output from legal financial claims held as money, debt, and equity instruments. If partnership runs sole firm each household contributes factors of production and draws goods.
SystemTheory
CC BY-SA 4.0
2020-12-23T00:47:41.687Z
@SystemTheory well but if you are adding extra assumptions then the above is no longer identity. Also, for those kind of assumptions you at least need 2 agents as in 1 agent economy they do not make sense since one agent can't be consistently assumed to be both an worker that does not save but consumes and capitalist that does not consume as it is a single person.
1muflon1
CC BY-SA 4.0
2020-12-23T01:07:11.793Z
@1muflon1 I agree Crusoe has dominion or exclusive control over his own labor efforts and decisions to allocate labor to production of some mix of capital and consumption goods. In ideal socialism with single firm the partnership households would somehow agree on respective contributions to production and distributions of consumption goods. Capitalist owners in the single firm would draw consumption goods against equity claims. Worker households would draw goods from wages and debt issued by the capitalist firm if wages are not enough for current consumption. Debt is necessary for firm profit.
SystemTheory
<macroeconomics><gdp>
How Does One Describe GDP Relations Assuming Only Wages and Profit Income in the One Person Economy?
SystemTheory
# How Does One Describe GDP Relations Assuming Only Wages and Profit Income in the One Person Economy?

(Asked by: username_0 on 2020-12-22)

I am trying to isolate a simple model for GDP accounting in the one person economy also known as the Crusoe economy. Because Crusoe lives alone and has dominion (exclusive control) over all items of economic value I assume he assigns zero value for rent as the return on land and extraction of raw materials. This means income is attributed to wages and profit. Also I assume Crusoe invests only in capital and holds zero inventory in the firm or business sector of his economy. He counts all other output as transfers to consumption in the household sector.

In terms of economic value instead of prices I want to know if wages and profit have a mathematical description in terms of respective contributions to total output?

1. Identity for Gross Domestic Product

> Output = Income = Expenditure

2. Classical factors of production

> land, labor, and capital

3. Classical factor payments

> rent, wages, and profit

4. Income in the circular flow assuming zero rent

> income = wages + profit

5. Expenditure in the circular flow assuming zero inventory

> expenditure = capital + consumption

6. Robinson Crusoe GDP identity with simplifying assumptions:

> output = capital + consumption = wages + profit

Questions:

> Is there a non-price equation for wages in terms of output and profit?

> Is there a non-price equation for profit in terms of output and wages?

Do these identities hold?

> wages = consumption?

> profit = capital?

**Tags:** macroeconomics, gdp

> **Comments:**
> **username_1**: What does "economic value instead of prices" mean?  
> **username_2**: what do you even mean by non-price? By definition wage **is the price for labor**, also return on capital - from which profit here consist of **is the price for capital**. If you dont want prices (and by prices I mean at least relative prices, you dont need prices in some currency) you need to get rid  of both wages and profit  
> **username_0**: So my question perhaps would be better stated as follows: can income as wages and profit be defined in terms of economic value independent of price? The answer seems to be no. The GDP output does have economic value independent of price. The economic value is used up in consumption in the household sector. Crusoe should think of his income as the flow of economic value to his household and should think of labor as the cost of producing his income. Crusoe does not profit from capital he uses it to generate his actual income as household consumption.  
> **username_2**: You can convert wages, profits etc into utility but for that you need to specify additional utility function and the relation would no longer be GDP which you said you are interested at the beginning. Also, the wage=consumption and profit=capital does not hold in the system above generally - even if we would apply some utility function to it it would not hold. For that you need to change the system above somehow.  
> **username_0**: Thank you I think Hyman Minsky makes arguments that profits equal investment spending under heroic assumptions using an identity called the Kalecki-Levy profit identity. However I think you are right that wages and profit are not meaningful in terms of economic value. If one goes away from a pricing system the GDP identities do not hold anymore and I don't think Crusoe would use a pricing system unless he got bored and was educated as an economist. One might imply his use of prices or some ratio of preference when he decides how to allocate labor to a mix of capital and consumption goods.  
> **username_2**: @username_0 except what you are saying is not correct. If you just google  Kalecki-Levy profit identity you will find that the profit identity in GDP consist of two terms investment and capitalist consumption so it is not profits equal investment but $\pi=C_p +I$ where $C_p$ would be capitalist consumption- now you can actually eliminate $C_p$ from the system with bunch of assumptions (which make system no longer an identity) but you will not get nice $\pi =I$ but only $\pi=f(I)$, so   profits are not equal to investment. You can say they are function of investment but that is not identity.  
> **username_0**: @username_2 As stated Minsky makes what he calls "heroic assumptions" on the Kalecki-Levy profit equation to argue that profit equals investment expenditure as a first case approximation. I think he assumes that workers do not save or invest out of wages they only spend for current consumption. And he assumes firms do not consume out of profit they only invest retained earnings. I am trying to isolate economic value of output from legal financial claims held as money, debt, and equity instruments. If partnership runs sole firm each household contributes factors of production and draws goods.  
> **username_2**: @username_0 well but if you are adding extra assumptions then the above is no longer identity. Also, for those kind of assumptions you at least need 2 agents as in 1 agent economy they do not make sense since one agent can't be consistently assumed to be both an worker that does not save but consumes and capitalist that does not consume as it is a single person.  
> **username_0**: @username_2 I agree Crusoe has dominion or exclusive control over his own labor efforts and decisions to allocate labor to production of some mix of capital and consumption goods. In ideal socialism with single firm the partnership households would somehow agree on respective contributions to production and distributions of consumption goods. Capitalist owners in the single firm would draw consumption goods against equity claims. Worker households would draw goods from wages and debt issued by the capitalist firm if wages are not enough for current consumption. Debt is necessary for firm profit.  

---

## 1 answers

### Answer by username_2 on 2020-12-22. Score: 0

I will only answer the last question because without further qualification the first two questions do not seem to make sense (see the my comment). Also to make everything cleaner I will use $w$ for wages, $\pi$ for profits, $Y$ for output, $C$ for consumption and $I$ for capital spending.

> Do these identities hold?

$$w= C \\ \pi = I$$

No. There is nothing in your system above that would suggest the above should hold. As you remarked on by definition:

$$\pi +w = Y = C+ I \implies \pi + w =C + I$$

Given the above the profits are actually equal:

$$\pi = C + I -w \text{ or } \pi = Y -w $$

and wages are equal to

$$w = C + I - \pi \text{ or } w = Y - \pi $$

The reason why the two identities ($w=C$ and $\pi =I$) won't hold might be best visualized by some practical example. Let us assume some overtly simplistic production function where $Y = L + K$, here marginal product of labor and capital are both $1$ so wage *per* unit of labor will be $1$ and return on capital also $1$.

Now, I am not sure if this was your question about 'prices' but note we do not need to necessarily need to use some real world currencies here and this prices could be denoted in apples, bananas etc (as commonly done in theoretical models - especially in international economics - see Feenstra Advanced international trade for some examples) but I will leave the units vague for simplicity. In addition note that GDP as a statistical measure - not as a concept of output - just look at production sold at market so that would in Robinson Crusoe economy be zero because there are no market transactions - but I assume here you are interested in the underlaying concept of output rather than statistical measure.

The above out of the way, let us assume that Robinson Crusoe starts 10 units of labor that he gets every time period, that he can invest in capital goods which cost exactly 1 unit of output and let see some example of $Y$ calculation across 2 different periods.

Period 1: Since there is no capital here output is produced with labor, as discussed above the price of labor is 1 so when 10 units of labor are supplied we get that $w=1(10)=10$, So we have $Y=w+\pi = Y=10+0$, now this by definition has to be equal to all spending but there is no reason why we should assume spending on consumption has to be equal to 10. That is one possibility but any combination of $C+I=10$ would work here. Let us assume that $C=5$ and $I =5$.

Period 2: By our assumption that it costs $1$ to acquire $1K$ now the Crusoe has $10L, 5K$. Given that the profit (under which you decided to put returns on capital) are given by $\pi = (1)5$, and wages are $w=(1)10$ so now output is equal to $Y= 5+10 =15$. As previously consumption and investment has to be equal $15$ *together* but there are various ways how you can achieve that. $C$ could be 5, which would mean $I=10$ or $C=15$ which would mean $I=0$, as long as $C + I =15$ any value for $C$ or $I$ that satisfies the equality will work.

Hence, generally $w\neq C, \pi \neq I$ save for special cases where $C$ and $I$ are choose by Robinson Crusoe to be exactly equal that amount.


---

