Re: Savings fallacy redux (was Re: Method)

[Bruce McFarling <ecbm@xxxxxxxxxxxxxxxxxxx>]

At 09:54 AM 9/1/02 -0700, John Vertegaal wrote:
>
>"Dr. Bruce McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx> wrote:
>
>>... it is invalid to conflate financial wealth and real wealth.
>>Which implies that seperate terms are needed for the seperate
>>values.
>
>In the real-world, or in the world as sketched by the GT; or are
>they the same?

In the real world, and in the world sketch by the G

>Is there any purpose or determinable value for
>"financial wealth", other than eventually being able
>to turn it into "real wealth"?

This is not a question that can be addressed by reference
to evidence UNLESS you avoid conflating the two.

>>The GT points out the connection between finance for EXPENDITURE,
>>the use of income to finance EXPENDITURE, and the use of income to
>>accumulate FINANCIAL wealth, that is, the SAVING that takes place
>>in the period.

>Yes but, as far as I understand it's a comparative static depiction
>of a dynamic reality.  Assuming for a moment that it's possible to
>turn the GT dynamic, would there still be a positive meaning left
>for the term "SAVING"?

That's am appropriate description for the neoKeynesian-
neoclassical synthesis modle loosely based on Keynes model.
Its not an appropriate description of the General Theory model
itself.  First, the General theory model is a period model, but
then many of the aggregates that it refers to only exist over
periods, do not exist as instantaneous values, and become known
to participants in the system *as* period aggregates, so that a
standard dynamic model borrowed from physics would not necessarily
be a better model for those particular economic variables.  Second,
the relationship between that expenditure that is not financed
from income and that income that is not expended holds at every
transaction included in the set of transactions being modelled.
Transactions involving that saving shift that saving around.  If they
are spending on newly produced goods or services, they shift the
saving balances around AND increase both spending and income, otherwise
they simply shift the savings balances around.  So the transactions
start out at:

I1=S1

and then they can either involve

I1=S1

or

I1+C' = S1+C'

The aspect that might vary between a discrete transactions model
and a period aggregate model is the C' part.  The GT model is more
open and less mechanical than the neoKeynesian model, but it does
presume that there is a relatively stable relationship between
income in a period and the consumption financed by that income in
that period, so that over the period:

C1=f_c(Y1)
Y1=C1+I1

so that:

Y1 = F(f_c,I1)

part of the greater openness than the neoKeynesian model being that
the GT model is in empirical terms, that is in dollar aggregates for
Y1.


>>There is no point in claiming to have found a "flaw" in Keynes'
>>reasoning if you first replace the definitions for the terms used
>>with entirely different definitions.

>If there is a "flaw" in Keynes' reasoning, it would be because he
>is at odds with reality. i.e. the GT cannot be turned "dynamic"
>without some of its definitions losing their original meaning.

Conflating savings with working capital creates a system that is
easier to make dynamic because you have taken part of the real
world OUT.  Ejecting reality in order to make a more "realistic"
model is just playing semantic games.
easier
--
Dr. Bruce R. McFarling, PhD
Bus. Office 1.72 -- (02) 4348-4078
School of Business
Faculty of the Central Coast
Newcastle University, Ourimbah