Reconciling Profit and Savings

Keynes reckons that in the aggregation of all production and consumption in a market can be viewed in terms of the following syllogism:

1. Income = Consumption + Investment
2. Savings = Income - Consumption
3. Savings = (Consumption + Investment) - Consumption
4. Savings = Investment

I have two objections. First, that the first equation seems to imply that a producer can increase his income by increasing his consumption or investment, which is plainly wrong. Income is derived by subtracting both consumption and investment from revenue. Second, that the income and consumption of the consumer are the same as the income and consumption of the producer, when they are in fact two different things.

Hence:

1. Producer Profit = Revenue - Producer Consumption - Capital Investment
2. Consumer Savings = Consumer Income - Consumer Consumption

There seems to be no connection between the two, until you consider that in the aggregation of all production and consumption, the producers' revenue is equal to the consumers' consumption (the consumers having purchased everything they consumes from producers), and that the income of the consumer is equal to the labor costs of the producer (the act of production based upon labor and materials, but the materials being provided by labor of other producers).

I also have the sense that capital investment is wrongly identified as something separate from cost. Investment in a business is a cash outflow that is ultimately a cost of production. The differentiation of a machine that will be consumed by the act of production, slowly and over the course of a decade, from other materials that will be consumed immediately in the creation of the current product is a matter of accounting in order to pay taxes on an annual basis (to spread the long-term costs over a longer period of time). It is essentially a cost of production and, going by the reasoning of the last paragraph, it too must be considered a labor cost (the cost of building a machine being the labor cost to mine ore, refine metal, forge parts, etc.)

To revisit the premises:

1. Producer Profit = Consumer Consumption - Labor Cost
2. Consumer Savings = Labor Cost - Consumer Consumption

Just looking at the equations, this would seem to set up a system of perpetual degradation, where the laborers consume as much as they produce, and at the same cost, but there is nothing to cover the non-labor cost, which must be covered either out of consumer savings or producer income, until one or the other (or both) is depleted entirely.

To return to syllogisms, this boils down as follows:

1. Producer Profit = Consumer Consumption - Labor Cost
2. Consumer Savings = Labor Cost - Consumer Consumption
3. Producer Profit = (Labor Cost - Consumer Savings) - Labor Cost
4. Producer Profit = - Consumer Savings

This ultimately leads to the notion that there is a negative relationship (rather than a positive one, as Keynes concludes) between producer profit and consumer savings, which makes sense in the notion of exchange: the consumer can only save less by paying less for goods (decreasing producer profit) and the producer can only increase profit by charging more for goods (decreasing consumer savings).

However, my sense is that this overlooks the nature of production - in effect, something is produced by the act of production, that is of greater value than the inputs consumed by its production. It's simple enough to conceive that when producer and consumer are one person (a single individual who consumes what he produces), the "savings" or "profit" are any amount of production above the needs of consumption. So it is not necessarily a zero-sum equation. But when the tasks of production and consumption are split among two parties, it creates the sense that something is lost or destroyed, rather than created, by virtue of the act of production. This cannot be correct.

In the end, I think I'm only confusing myself further - and it's probably best to stumble forward and revisit this notion at a later time and figure out where I went wrong. If there's been any value to this meditation, it may be in understanding one of the fundamental flaws of Keynes's general theory.