Value & Capital, CHAPTER XIV, Section 5

This section continues the discussion of the definition of income.  Whereas the previous section examined the definition in the context of interest rates that are expected to change, the present section considers what happens when we expect prices to change.  In this case, the author introduces a new definition (the third one of the chapter):

Income No. 3 must be defined as the maximum amount of money which the individual can spend this week, and still expect to be able to spend the same amount in real terms in each ensuing week.

The author considers an individual who plans to spend £10 each week.  If prices are expected to rise each week, then the individual must expect to be less well off as time proceeds (because the rising prices imply that he is getting less for his money each week).  If prices can fluctuate up or down, and £10 is to be the individual's weekly income (in the sense of Income No. 3 as defined above), then "he will have to expect to be able to spend in each future week, not £10 but a sum greater or less than £10 by the extent to which prices have risen or fallen in that week above or below their level in the first week."

As the author notes, this sort of correction is "obviously desirable," but in general there is no completely satisfactory solution.  One could take a set of planned expenditures and expected prices, to compare with a given income to see "whether it is such that the planner is living within his income," but unless expenditures exactly equalled income, it would be unclear "exactly how much his income is."

As the author notes, this indeterminateness is not the only difficulty with Income No. 3; there is also the matter of durable consumption goods.  By definition, a given amount of expenditure on durable goods does not constitute that amount of consumption of such goods.  The definition of income should really refer to an amount that can be consumed (not spent) during a period of time while expecting to be as well off at the end of the time period as before.  "It is only if ... the acquisition of new consumption goods just matches the using up of old ones, that we can equate consumption to spending, and proceed as before."  If these things do not match, if the individual is drawing down his stock of durable goods, he must take other steps so that his planned consumption leaves him as well off at the end of the planning period as at the beginning.