Capital gains, savings, and income

In response to my previous query, the ever-intelligent Arnold Kling writes:

For an individual, I am willing to count a capital gain as income. I am more or less indifferent between earning a capital gain and earning a dividend.

For a nation as a whole, to a first approximation I do not believe that a capital gain is possible. Suppose a corporation issues a bond, and a year later the market revalues the bond upward by 10 percent. It seems to me that the bond owners’ gain is the corporation’s loss. I think that is true in general for capital gains and losses in the economy–they net out.

Another way to arrive at the view that capital gains and losses ought to net out for the nation as a whole is to consider that national income equals national output. If a re-valuation of assets produces no output, then it produces no income. It seems to me that the ups and downs of financial assets are quite properly excluded from national income and therefore from national saving.

Read more here. offers a similar perspective.

My take: I have no desire to overturn the conventions of national income accounting.  But this view still fuels the belief that our currently measured low savings rate does not matter much.  (Non-bubbly) capital gains imply high future output and possibly high future savings as well.  Let’s say you received news that manna would drop from heaven in five years’ time.  No this news is not "savings" but you still have something to eat in the future.

Let’s say the capital gains are bubbly and thus temporary.  Some people still are more liquid in the meantime (exam question: is anyone less liquid?  Do these liquidity losses offset the gains?).  Surely this should count for something, although not nearly as much as non-bubbly capital gains would count.

Can the Keynesian distinction between individual and social liquidity be used to create a new version of Hayekian business cycle theory?


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