RE: General Theory Seminar --Savings and Investment

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

In the Keynesian Cross diagram, any situation when S does not equal I is a
disequilibrium. It is also a disequilibrium in Classical Economics. The
difference is that in Classical Economics, the price of capital adjusts to
bring S and I into equality and in Keynes' model, Income adjusts to bring S
and I into equality.

As many on this list have pointed out, it was Samuelson and other U.S.
Keynesians who explained the Keynesian Cross model as if it were an
engineering system.

As more than one contemporary intro text points out-the Keynesian Cross is
intended to be a way of showing the interrelationship of Income and
Spending. It is not the final word or a literal representation of the
economy.

Though some would disagree with me on this list, I would go farther and note
that in the more advanced IS-LM model (even with prices and an open economy)
the definition of savings and investment as employed in the Keynesian cross
is not different. The ISLM model can also be interpreted as an engineering
model. Or, it can usefully be used (especially as a pedagogical tool) to
organize one's thinking about how changes in one sector of the economy
impact the other sector.

If you interpret any of these models as intended to show, or as supporting
the proposition that there is one unique equilibrium point based on stable
relationships in the economy, then some of your criticisms may apply.

> -----Original Message-----
> From:	William B.Ryan [SMTP:william_b_ryan@xxxxxxx]
> Sent:	Thursday, March 09, 2000 11:35 PM
> To:	POST-KEYNESIAN THOUGHT
> Subject:	Re: General Theory Seminar --Savings and Investment
>
> >From mwitte@xxxxxxxxxxxxxxxxxx
>
> "No, the Keynesian 45-degree line income expenditure diagram concerns
> the equilibrium of the economy at a given point in time.  As such, in
> equilibrium in this framework S=Y-C for each individual and the
> economy as a whole.  Individuals who are dissaving are selling their
> assets to those individuals who are saving and so these transactions
> net out, resulting in no net savings.  However, to the extent that the
> savers exceed the dis-savers, that those who spend less than their
> income exceed those who spend more, there is net saving which must be
> balanced out in the simple model by a positive level of investment to
> match the level of output with the level of spending."
> ------------
>
> All this does is put the syllogism's fallacy into a graphical form.
> It flows from Keynes' assigning the words "saving" and "investing" to
> the same thing contrary to ordinary definitions.  Notice too that time
> is absent from either the vertical or horizontal axis, so it the
> description of something that is not dynamic but static.
>
> Note too that there could never not be "equilibrium," since by the
> definitions the condition of "equilibrium," S = I, must be
> tautologically true always.  The talk of "planned" versus "unplanned"
> are attempts to get out of this obvious contradiction.
>
> Let's define investment more reasonably as being the *process* of
> improving the quantity and quality of capital.
>
> Let's define saving more reasonably as the *process* of not spending
> from your income today so that you can spend from your savings someday
> in the future.
>
> These processes can be graphed on the same chart which correlates them
> with time on the X axis.  See
> http://www.geocities.com/william_b_ryan.geo/flux-reflux.jpg
>
> T1 represents gross cash disbursements from firms to the consuming
> sector.  The rate of disbursements is increasing representing
> financial investment on the part of the entrepreneurs facilitated by
> credit expansion.  T2 represents gross spending by consumers including
> spending from their income and savings, which is increasing because
> their income is increasing, for goods and services purchased from
> firms. Instantaneously measured, there is a gap between the rate of
> disbursements to consumers and their spending in reflux--which is
> explained through the *Principle of Reflux.*  See fundamental theorems
> at http://www.geocities.com/william_b_ryan.geo/fundamental.html
> T3 is the expenditure curve arbitrarily placed along the X axis
> according the the conventions of double-entry accounting through
> the depreciation of capital assets, which delays the *expensing* of
> cash disbursements in purchase of those assets into the future. In a
> growing economy, the flux is always greater than its reflux.  TX
> represents simultaneous measurment.  The "gap" between T1 and T2
> represents accumulation to debt.  The "gap" between t2 and T3
> represents entrepreneurial profit.
>
> In this real-world model there is no way that savings could equal
> investment except by pure chance.
>
> Bill Ryan
> william_b_ryan@xxxxxxx
> Internet: http://www.geocities.com/w_b_ryan
>
>
>
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