Unlearning Econ linked to a great piece by Simon Wren-Lewis on a Neoclassical idea that has led to no little confusion over the years, the identity Savings=Investment (S=I).
Often you hear conservatives say that if consumption falls that's not a problem and may even be salutary as this means savings has increased and so investment must necessarily increase. This idea is false: the fact that savings go up today in no way guarantees that spending will go up in the future. They would have us believe that the choice between consumption today and consumption tomorrow-which they define as investment. As W-L notes:
Q: If consumers spend less and save more, does this mean investment must increase?
http://mainlymacro.blogspot.com/2012/01/savings-equals-investment.html?showComment=1376698547320#c2407559975320293569
This is a crucial point that S=I is just an identity. Remember that time when Sumner tried to win an argument W-L and Keynes by appealing to S=I?
http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumner-becomes-even-more-shrill.html
I see that my favorite conservative-Morgan Warstler. with apologies to Patrick Sullivan; I do appreciate you stopping by Patrick, but I do think that Morgan has a unique talent as a conservative to really be able to make liberals offers that are tough to refuse; you're trouble is that you're always trying to catch liberals in a 'gotcha moment' when, the fact is there is no smoking gun- dropped in on W-L's post. Here is Morgan:
The point is Simon's goal is the re-distribution of wealth, from that goal he starts talking. That is NOT, CANNOT BE, economics. That is a social agenda that actually pits him directly against economics."
I left this comment in answer to him then realized this post was from 6 months ago so I'll cut and paste my comments here:
Morgan are you unaware that economics is a social science-no matter it's pretensions... It's not physics. As economics is a 'science of society' where would a social agenda be more appropriate?
You too from what you've said on many occaisons clearly have a social agenda. You've hear of the Immaculate Conception? Well this conservative definition of economics is the Immaculate Economy
Often you hear conservatives say that if consumption falls that's not a problem and may even be salutary as this means savings has increased and so investment must necessarily increase. This idea is false: the fact that savings go up today in no way guarantees that spending will go up in the future. They would have us believe that the choice between consumption today and consumption tomorrow-which they define as investment. As W-L notes:
Q: If consumers spend less and save more, does this mean investment must increase?
A: Absolutely not. Someone increasing their saving does not automatically imply that some firm will decide to buy more capital goods.
Q: But surely savings equals investment by identity in the national accounts.
A: Indeed. Total output = total income = total expenditure = Y. In the most simple model of a closed economy without government, income (Y) = consumption (C) + saving (S), but also expenditure (Y) = consumption (C) + investment (I). So S=I by definition. But here investment includes what is called ‘stockbuilding’ or ‘inventory accumulation’, which includes goods that firms wanted to sell but could not. To make this clear, lets split measured investment (I) into these two components: I=DK (buying new capital goods) +DS (stockbuilding). So if people consume less (C falls), but investment in new capital (DK) stays the same, measured investment rises because firms accumulate inventories of the goods that consumers did not buy (DS rises).
http://mainlymacro.blogspot.com/2012/01/savings-equals-investment.html?showComment=1376698547320#c2407559975320293569
This is a crucial point that S=I is just an identity. Remember that time when Sumner tried to win an argument W-L and Keynes by appealing to S=I?
http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumner-becomes-even-more-shrill.html
I see that my favorite conservative-Morgan Warstler. with apologies to Patrick Sullivan; I do appreciate you stopping by Patrick, but I do think that Morgan has a unique talent as a conservative to really be able to make liberals offers that are tough to refuse; you're trouble is that you're always trying to catch liberals in a 'gotcha moment' when, the fact is there is no smoking gun- dropped in on W-L's post. Here is Morgan:
The point is Simon's goal is the re-distribution of wealth, from that goal he starts talking. That is NOT, CANNOT BE, economics. That is a social agenda that actually pits him directly against economics."
I left this comment in answer to him then realized this post was from 6 months ago so I'll cut and paste my comments here:
Morgan are you unaware that economics is a social science-no matter it's pretensions... It's not physics. As economics is a 'science of society' where would a social agenda be more appropriate?
You too from what you've said on many occaisons clearly have a social agenda. You've hear of the Immaculate Conception? Well this conservative definition of economics is the Immaculate Economy
One of the biggest pretensions of conservative economics is the idea that the market is somehow not a social system, a social construct. Recall Margaret Thatcher's claim that society doesn't exist?
A similar topic came up on pragcap recently, exposing a bone of contention between MMT and MR (one of many):
ReplyDeletehttp://pragcap.com/yes-government-deficits-equal-private-surpluses
I favor MR in this dual, and I see the point of Cullen's post, however, I still don't like that
S = I + (S-I)
that the MR guys like so much. I see what they mean but I prefer the long form of it: the way it's written there is the definition of a tautology, right?
Yeah what is the long form? I'm only familiar with it like this so it always puzzles me as it is a tautology.
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