§6. Money Income

We have just been dealing with money payments for consumption goods, or money outgo. We may now go back one further step to money received by the individual spender, or money income. Money income includes all money received which is not obviously, and in the nature of the case, to be devoted to reinvestment—or, as the expression is, "earmarked" for reinvestment. In other words, all money received and readily available and intended to be used for spending is money income. It sometimes differs from real income considerably. For instance, if you more than "earn your living" of $6,000 with a salary of $10,000, you voluntarily put by the $4,000 remaining as savings. This part of your money income is saved from being turned immediately into real income. That is, instead of spending all your salary for this year's living you invest $4,000 of it to help toward the cost of living of future years. And so, the $4,000 is not only credited as income but debited as outgo. With it you buy durable objects such as land or buildings, or part rights in these, such as stocks or bonds. Your money income is Edition: current; Page: [11] in this case your salary (or it may be dividends, rent, interest, or profits) and it exceeds real income by the amount of your savings. On the other hand, you may be living beyond your (money) income. This means, expressed in terms of the concepts here used, that your real income for the year is greater than your money income.

That all one spends on his living measures real income, even when he "lives beyond his income" (beyond his money income), may be a hard saying to some who have never attempted to work out consistent definitions of economic concepts which will not only satisfy the requirements of economic theory but which will also bring these economic concepts into conformity with the theory and practice of accountancy. But a definition of income which satisfies both theory and practice, in both economics and accountancy, must reckon as income in the most basic sense all those uses, services, or living for which the cost of living is expended even though such expenditure may exceed the money income.

Thus we have a picture of three successive stages, or aspects, of a man's income:

Enjoyment or psychic income, consisting of agreeable sensations and experiences;

Real income measured by the cost of living;

Money income, consisting of the money received by a man for meeting his costs of living;

The last—money income—is most commonly called income; and the first—enjoyment income—is the most fundamental. But, for accounting purposes, real income, as measured by the cost of living, is the most practical.4

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To recapitulate, we have seen that the enjoyment income is a psychological matter, and hence cannot be measured directly. So we look to real income instead; but even real income is a heterogeneous jumble. It includes quarts of milk, visits to the moving picture house, etc., and in that form cannot be measured easily or as a whole. Here is where the cost of living comes in. It is the practical, homogeneous5 measure of real income. As the cost of living is expressed in terms of dollars it may, therefore, be taken as our best measure of income in place of enjoyment income, or real income. Between it and real income there are no important discrepancies as there are between money income and real income. Money income practically never conforms exactly to real income because either savings raise money income above real income, or deficits push money income below real income.