Chapter Ⅲ. Kinetic
Theory of Income
1. Composition of Income Theory and Significance of GDP
2. Kinetic Principle of Income-Chaos
3. Kinetic Principle of Income-Fluctuation
4. Kinetic Principle of Income-Determination
5. Ways to Enhance Growth Potential according to Income-
1. Composition of Income
Theory and Significance of
What is income theory? What does the theory tell us? The answers to these questions are relatively simple. It is enough for us to know just four things through the theory: how the level of income is determined, why and how business cycle happens, how income fluctuates and changes suddenly. To be more specific, why the income per capita of USA is 53 thousand dollars in 2012 and 48 thousand dollars for Japan, while South Korea is at 25 thousand dollars and a poor country like North Korea is less than 2 thousand dollars? Why is it said good in South Korea when the growth rate is 6% or more, while it is said good in USA even when it is only 3%? Why do some countries grow fast while others grow slowly? Why are there occasions when a boom or a recession often comes? It is the income theory that answers to these questions. The income theory of Choe's Economics is somewhat complicated as mentioned above, while the mainstream economics mainly focuses on income fluctuation. For reference, the mainstream economics presumes that it is possible to identify the level and change of income by utilizing the production function, but there is little realistic utility as it will be revealed in the followings of this book.
First of all, it is necessary to reveal that the income theory of Choe's Economics consists of three principles as well as the price theory. They are Chaos Principle, Fluctuation Principle and Determination Principle of Income. The phenomena produced by these three principles are synthesized to make income phenomena that we see in reality. So what is the determination principle, the fluctuation principle and the chaos principle? In short, the determination principle determines the national income per capita of 25 thousand dollars and the average growth rate of 6~7% in South Korea. The fluctuation principle determines the income fluctuation by how high the growth rate is, And the chaos theory is the law of the effects on income of sudden accidents such as a natural disaster, oil shock and so on.
These three principles have independent theoretical systems, but they are also closely related to each other as follows. The chaos principle affects the fluctuation principle by invoking the change of income, and the fluctuation principle affects the growth rate, thereby establishing a close relationship with the determination principle. And each kinetic principle also influences in the opposite direction and mutual relations between them are established by receiving affects from the others. The income phenomena that all the kinetic principles make in these mutual relations appear syntheses, which is the business flow that we see in the real world. And the income as a synthetic phenomenon forms an integrated economic flow which affects the individual phenomena represented by the respective kinetic principles. Simply put, it means that the whole and the parts interact.
From now on, let's look at the three kinetic principles and their correlations in detail. Before that, there remains one problem for us to solve first. Since the criticism that the economic index of Gross Domestic Product is not related accurately the welfare of people has been steadily raised from some economists, it is necessary to clarify this problem at this opportunity. They have criticized that GDP does not take into account and ignores the goods and services which are necessary and good for people such as leisure and hobby, which are not traded in the market such as caring for children, cooking and cleaning house for family, which cause side effects such as environmental destruction and traffic jam, which are traded in the underground economy such as drugs and so on. They have insisted that GDP is often contrary to the welfare level of people as above.
However the criticism above mentioned comes from an incorrect perception of economic indicators. In fact, the concept of GDP is not a measure of the welfare. By analogy, the fact that GDP does not reflect the welfare is not much different from the fact that price does not reflect the value of goods. Understanding accurately this point of price makes it easy to understand what role the economic indicator of GDP plays and what function it should perform. Furthermore, it may lead to a serious policy or economic failure if we try to improve the concept of GDP based on recognizing it as a measure of public welfare. Particularly, it could worsen the public welfare as well as the national income if the policy in order to promote welfare affects negatively the business flow. Keeping the economy stable is so important as will be looked into this issue in detail at the section on the 'Scientific Economic Policy'. Let's solve this problem with a focus on examples of our real life.
The price difference between a branded product and a common product is very large. The shoes attached a famous brand would be sold at two or three hundred dollars but the common shoes would sold at twenty or thirty dollars even if they are made in a same plant. This case is often found around us. The price difference between the goods selling in a luxury department store and goods selling in a conventional market is remarkable even with similar quality. However, it can not be said that the utility of each product to consumer is as large as the price difference. The price does not reflect the utility of consumer. So can prices be said to be inadequate as a measure of value?
Let's look at one more extreme case. From the viewpoint of humanity, the food needed for a child who suffers from hunger is more precious than that for a dog. However, it is a reality that a high-quality feed for a dog is sold at a price much higher than the food needed for a starving child. Nevertheless, no economist points out the limitation or irrationality of price. Price is not an absolute measure of value but has a function of trading ratio. In other words, price plays a role of signal lamp that enable goods to be produced, traded and circulated. Price, thereby, plays an important role to circulate and grow the economy.
The same is true of the concept of GDP. It can not be discounted because it does not represent the welfare level. Rather, GDP has a much more important economic function than the indicator of public welfare. In short, GDP functions as an indicator that shows whether the economy is strong or sluggish and whether it is rising or falling. Given this function, GDP plays an important role as well as price. The significance of GDP is briefly demonstrated by the following article in the [Economic Indicators Commentary] published by the Bank of Korea in 2000.
“The statistics of Gross National Product which were estimated first by Simon Kuznets in the early 1930s have been the benchmark for the US government and companies to establish economic policies. Without a big picture of the economic situation provided by GNP, policy makers would not have the information they need to understand correctly the economic situation and would not be able to take a proper policy. In the Great Depression, Franklin Roosevelt and his staffs knew that millions of people lost their jobs, railroad traffic was shrinking and steel production was sharply reduced, but they was puzzled because they did not have a big picture of the economic situation. They did not know what to do due to lack of information on the whole economy.
Just as a doctor analyzes all the results of diagnoses and then makes a prescription, a policy maker also has a tool in GNP for deciding important policy. The trend of USA economy has shown that the gap between boom and recession has become smaller after the statistics of GNP have been fully developed and widely used. The biggest decline in the last 50 years falling by 1.9% in 1981-82(2.8% in 2009), while the biggest fall in GNP was 13% decline in 1932. The big business cycle of the past has disappeared and there has been no mass withdrawal of deposits, financial crisis, deep and long-term downturn and long-term unemployment, since the statistics of GNP has been developed and used in policy. In this way, the Department of Commerce has provided a very useful economic indicator of GNP for a long time, which has had a very positive effect on the health of the economy.” For reference, GNP is a term used before GDP is generalized.
Understanding the fact that GDP has such an important function is very important for reading the economy accurately. There is no hesitation in reading the economy by using the index of GDP and thus it is possible to gain confidence in reading the economy if the confidence in the concept of GDP is understood firmly. And this self-confidence raises the ability to diagnose and forecast the economy.
The criticism of some economists on GDP should be criticized in the sense that lack of self-confidence leads to neglect self-development. It is desirable to develop an indicator that shows well the welfare level, rather than to criticize GDP. Indeed, various indicators have been developed in order to show the welfare level. But I can not understand what its usefulness is. In my opinion, it is the same as asking 'how happy is a person who has received higher education?' More GDP or more income broadens your choice as higher education does.
So how is the GDP given? What determines GDP? The income theory is exist to answer this question. By the way, income is not a simple phenomenon but a synthetic phenomenon as has already been said. it is synthesized by each phenomenon caused by the Income Chaos Principle, the Income Fluctuation Principle and the Income Determination Principle. This is the income and GDP that we see in reality. Now let's look at these three kinetic principles in turn.