RE: General Theory Seminar --Savings and Investment

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

see below

> -----Original Message-----
> From:	William B.Ryan [SMTP:william_b_ryan@xxxxxxx]
> Sent:	Wednesday, February 16, 2000 8:31 PM
> To:	POST-KEYNESIAN THOUGHT
> Subject:	Re: General Theory Seminar --Savings and Investment
>
> Referencing http://csf.colorado.edu/forums/pkt/2000/msg00115.html from
> Clifford Poirot, which was in reply to Geoffrey Gardiner's
> http://csf.colorado.edu/forums/pkt/2000/msg00114.html
>
> 1. "In equilibrium Y = AE (aggregate spending) = C + I..."
>
> This cannot be correct if Y is defined to be factor income in terms of
> cash flow, that is to say, in terms of purchasing power placed into
> the hands of final consumers.
>
	This definition *must* be true, or you simply disagree with the
terms as defined and understood in common usage among economists. That is to
say, you do not accept standard and conventional forms of national income
accounts. A critique of national income accounting would certainly be
relevant, but I feel that the burden is on you to specify how and why you
develop this critique.

> Returning again to the terminology of the A + B Theorem, from the
> perspective of the firms sector, such spending is categorized as "A"
> payments.  All other spending is categorized as "B" payments.  At
> "equilibrium" or more properly steady-state, it is only correct to say
> that the ratio of A + B remains constant to A.
> See: http://www.geocities.com/CapitolHill/Senate/7018/ratio.jpg
> If there are natural growth vectors causing parametric shift, the
> concept of equilibrium in a regime of laissez-faire becomes
> meaningless.
>
	[Clifford Poirot]
	The condition as one for equilibrium-the level of employment, income
and prices as determined by spending was first developed by Keynes in the
GT.  Keynes' use of equilibrium is quite different from the Classical use of
the term equilibrium. In Marshallian economics, equilibrium means that
markets clear at the individual level. In the Walrasian world, all markets
clear simultaneously. This was quite obviously not Keynes' view of
equilibrium. To Keynes, equilibrium was a condition where all the incentives
were to continue on.

	Harrod worked out the issues in a dynamic setting and dealt
precisely with this problem-that of the economy attaining an "equilbrium" in
a dynamic sense-staying on a steady state path-given changing parameters.
Though Harrod's model is "simple", it does serve to illustrate well the
issue of dynamic, knife-edge instability ( a point incidentally, that even
Solow has more or less conceded with out really conceding).


> Conventionally, in accounting, the proceeds from loans are not
> classified as "income," nor when loans are repaid are such
> disbursements classified as "expenses."
>
> 2. "...If I > S, then spending increases..."
>
> Macroeconomically, spending increases only if a) there is the spending
> down of previously accumulated balances, in which case the effects can
> only be transitory to the limit of such previously accumulated
> balances; or b) there is credit expansion.  It is only through credit
> expansion that long-term growth in the financial sense becomes
> possible.  In principle, credit expansion can occur in either the
> consumers or firms sectors.  Therefore increasing spending is
> accommodated by credit expansion, not I > S.
>
	Though the net leakages, net injections model is simple, it does
illustrate some very good details of the Keynesian model. Specifically, that
of the relationship between the financial sector and the "real" economy as
well as the possibility of feedback effects and path dependency. In the
Classical model, when I > S, interest rates must rise, thus causing a
decrease in quantity of investment demand and increase in quantity of
savings. This brings S and I into equality. In the Keynesian model, I>S has
feedback effects on the rest of the economy. This spending is accomadated by
the creation of credit and rising income allows savings to expand. In other
words, you missed the point about the difference between applying
Marshallian price-quantity adjustments to the macro level and analysing the
macroeconomy in terms of dis-equilibrium income adjustments.

>    3. "S = Y - C"
>
> See the diagram at
> http://www.geocities.com/CapitolHill/Senate/7018/flux-reflux.jpg
> Where credit expansion is to the firms sector, t1 represents
> increasing "A" payments to consumers, while t2 represents increasing
> consumer spending in reflux back to firms.  The gap between
> instantaneously measured t1 and t2 represents accumulation to debt,
> not savings.
>
	I still do not think that you get the point. Households save out of
factor income. Firms Invest.

> 4.  "S = I"
>
> This postulate of equality (saving-investment equality postulate) is
> an unnecessary hold-over from the classical analysis that causes great
> confusion.  Saving is never "equal" to investment "ex post" or "ex
> ante," because they are quite different processes--both in real and
> financial terms.
>
> Saving is the process of accumulating wealth; macroeconomically, it is
> a measure of the accumulation of wealth.  Investment is the process of
> improving the quantity or quality of capital.
>
	Well, on this last point at least, we agree-almost. Saving is the
process of increasing a household's individual financial wealth, or
collectively, the nation's financial wealth. However, the process of
physical capital accumulation also increases the productive capacity.
Financial wealth is the expression of this.

>  Bill Ryan
> william_b_ryan@xxxxxxxxxxx
> http://www.geocities.com/CapitolHill/Senate/7018
>
>
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