I really like Hellestal’s comment and linguistic take on this whole business:
I’m comfortable changing my language in order to communicate. I have very little patience for people who aren’t similarly capable of changing their definitions.
This discussion is really about the words we use to describe different accounting constructs. Nick totally gets that as well.
So I’m ready to say, “fine, let’s call investment saving.” That’s perfectly in keeping with the very sensible understanding found in Kuznets, father of the national accounts. He characterized real capital — the actual stuff we can use to create more stuff in the future — as “the real savings of the nation.” (Capital in the American Economy, p. 391.)
So when you spend money to produce something that has long-lived (and especially productive) value, you’re “saving.”
But still, I gotta wonder: why don’t we just call it…investment?
Because this S=I business confuses the heck out of everyone. Some of the smartest econobloggers on the web have spilled hundreds of thousands of words over the last several years trying to sort out this confusion. I’ve read most of them, and I’m still confused. And I’m quite sure that all non-economists who’ve looked at this (and many or even most economists) are as well.
And that’s not a surprise. Here are a few reasons why:
1. When you invest in real assets, you’re spending. That’s why it’s called investment spending. So spending = saving. Really?
2. When you pay someone to build you a drill press, you’re saving. When you don’t eat some of this year’s corn crop, you’re saving. When you pay off some of your money debt, you’re saving. When you don’t spend some of the money in your checking account, you’re saving. Each of these is true within a given (usually implicit) balance-sheet/income-statement accounting construct. But are they anything like the same thing?
3. As I showed in my last post, f you look at the “real” domestic private sector — households and nonfinancial businesses (most people’s implicit default context) — the amount of saving (income minus expenditures) has absolutely no relationship to the amount of investment spending. Saving is always insufficient to “fund” investment. And the changes in the two measures don’t move together, either in magnitude or direction. (Aside from the long, multi-decadal growth in both as the economy grows.)
4. When you “save” by investing, you decrease the amount of money on the left-hand (asset) side of your balance sheet, while increasing the amount of real assets on that tally. Your total assets are unchanged. Have you saved?
5. When you pay someone to write a piece of software, you get a long-lived real asset. You’ve saved. But the money you gave them is income for them, so it contributes to their (money) savings as well. Do you double-count those savings, or did “the economy” get that software for free?
6. Investment means “gross investment” — all the money spent on long-lived goods, including replacement of long-lived assets that have been consumed in the period (through use, decay, and obsolescence, and — for inventory of consumer goods — actual consumption). But in KuznetsWorld, shouldn’t we be talking about net investment — the additions to our stock of long-lived assets? Gross consumption minus consumption of fixed assets (and inventory changes)? Shouldn’t we call net investment “saving”?
I know: there’s (at least apparent) confusion in some of these, but that’s rather my point. And there are answers to all of these in the context of S=I. (All of them, I think, based on the flawed [neo]classical accounting constructs embodied in the NIPAs. That’s my next post.) I’ve read them all, every which way from Sunday. But do they help anybody understand how the economy works, or…quite the contrary? If they do, why do all those econobloggers feel the need to worry at this, constantly?
I’m not sure this really solves the problem, but I’d like to suggest that saving should mean what everybody in a monetary economy means when they use the word: money saving. Monetary income minus money expenditures. In dollars, or whatever. (And while we’re about it, when you take out a loan or spend out of your savings, let’s call those “borrowing” and “spending,” not “dissaving.”)
Meanwhile investment (in economics discussions) should mean what economists mean when they use the word: “spending to create fixed assets and inventory.” (Because the national accounts only count spending on structures, equipment, software, and inventory as investment.)
And actually, that’s what it already means.
Why do we need to call it saving?
Cross-posted at Angry Bear.
Comments
134 responses to “Okay Fine, Let’s Call Investment “Saving.” Or…Not”
“I’m not sure this really solves the problem, but I’d like to suggest that saving should mean what everybody in a monetary economy means when they use the word: money saving…”
It already does with respect to saving, which is a monetary flow.
The = sign in these various equations does not represent equivalence in substance, but equivalence in corresponding monetary value at the time of exchange.
At the net macro level, the act of investment is an act of swapping of saved monetary income for real assets.
“Why do we need to call it saving?”
We correctly don’t, we correctly don’t need to, and we correctly shouldn’t.
Its only the measured amounts that are the same.
You’re in for disappointment, perhaps through frustration. There are no short cuts to this. People can’t communicate effectively by creating their own definitions. Something that is difficult is not necessarily wrong.
(Each of your examples 1 through 6 contains an error, but I suspect you’d guess I’d say that.)
What needs a better mouse trap is not NIPA, not the Flow of Funds, and not the System of National Accounts. These things are all inter-convertible with appropriate adjustments.
What needs a better mouse trap is just about everything in economics apart from that.
@JKH
“We correctly don’t, we correctly don’t need to, and we correctly shouldn’t.”
The way I understand it, in double entry nothing disappears, which is one of the chief purposes of double entry, so, according to the rules, LHS and RHS have to equal each other. That means that the funds spent on production in aggregate must equal all the aggregate income earned from payment of those funds. Expenditure (GDP) is identical to income (Y).
Where the issues arise is naming what the portions ascribed. The portion of funds spend on producing consumption goods (including profit) is identical with the portion of funds spent on consomption goods. The residual spent is called “investment,” but this includes inventory as well as capital goods, and inventory includes unplanned inventory, as well.
On the income side, the portion spent on consumer goods is pretty straight forward, with some non-intuitive items at the margin. Issues arise with saving, since “saving” as the residual of income that is not spent on consumer goods must equal investment as the amount spent on production that is not allocated to consumer goods.
Most people think of saving in terms of bank deposits, and the intuitive understanding of saving is equivalent to investment is that businesses obtain the residual of income that is not consumed either from individuals as primary investment or from intermediaries as debt. So saving (S) includes what people ordinarily call saving as bank deposits and also financial investment held as equity in portfolios.
Add to that the fact that changes in equity on the RHS have to be reflected in terms of saving on the LHS and things really get confusing for many people.
What this seems to indicate to me as an analytical philosopher observing the use of symbols is that some symbols are being asked to do to much and wrt to “saving” and “investment” this is leading to ambiguity and confusion. I submit as evidence the recent attempt on the part of many smart people that are professionals in related professions to clarify this, without success so far, since the debate still rages, often heatedly.
I can only conclude that is an issue with the imprecise use of technical language complicated by the use of the same terms in technical language with ordinary language, especially when the ordinary language use often is at odds with technical usage.
I am always been confused about S=I. For the record, I have never taken a class on econ, finance, accounting, etc. I do have a PhD, and I use it, but it has nothing to do with dollar signs. The sectoral balances approach to the national accounting identity is pretty intuitive to me, but S=I is not, so I went to YouTube and watched a video of someone working through the national accounting identity to show that S=I, and I have to say that the whole thing seems tautological. Basically, savings is what is left over after spending, but they simply don’t include investment as spending.
As an econ layperson, this makes absolutely no sense to me. Money spent on capital equipment, warehouses, factories, etc., still makes its way into the economy just like buying cars and shoes. Whatever additional boost is generated from investment will show up in personal consumption in that or some other time period, correct? It doesn’t make sense to me at all why investment would be treated differently from the national accounting perspective. Maybe I’m missing something – maybe there is away to get at savings directly (rather than as a residual) that would clarify things? But claiming that “Savings equals investment because investment is not spending and savings is income minus spending” doesn’t seem to do much to advance the field of macroeconomics… its all seems a matter of definitions…
Seems like a pretty fair summary Tom, with a couple of additional points. We should be careful to distinguish between micro and macro when opening a thought with “saving includes”. We should be careful to distinguish between flow and stock when referencing saving as a flow and savings as a stock. And we should be careful to distinguish between accrual and revaluation, as revaluation applies only to stocks by accounting definition. I don’t think there’s anything controversial in those caveats.
I certainly agree we are expecting too much from the symbol S, as per my recent comment at Interfluidity.
But you can’t avoid debate in a learning process where learning is incomplete. And you can’t avoid the fact that logical complexity requires learning.
I also think that post Keynesians in general and MMTers in particular should agree with the idea that mainstream economics is short in accounting skills – and that accounting is critical to understanding economics. While I don’t fancy the MMT presentation of its accounting understanding, I certainly respect the fact that this understanding exists and is embedded in MMT.
“But still, I gotta wonder: why don’t we just call it…investment?”
Here’s my personal experience:
I’m standing on the dirt-ball, looking east in the wee hours of the morning, and the fire-ball rises in the sky. And oh, it’s “sunrise”. Which is astronomically bunk. The micro experience doesn’t fit with the macro reality. It’s my dirt-ball that’s rotating the fire-ball into view. So when I’m talking about the big picture of the solar system, I don’t really use the word “sunrise” anymore. I have to move beyond that to get anywhere.
Here’s my personal experience:
I’m earning an income that exceeds my personal expenses. I’m building up quite a nest egg here. And oh, it’s “savings”. Which is (potentially) macroeconomically bunk. My outgo is someone else’s income. My income is someone else’s outgo. In order for the whole society to “save” for the future, we need to make it easier to produce things in the future. The big idea here is investment, i.e. capital goods. So when I’m talking about the big picture, I don’t really use the word “saving” anymore. I have to move beyond that to get anywhere.
So yeah, my own suggestion would be to just call it “investment”… and then to stop using the word saving. Just my opinion, but I think the term S tends to be like the term sunrise, only useful when we’re talking the narrow perspective of an individual person. It is less felicitous from a broader viewpoint, when we include all those big chunks of rock flying around.
People who happily use the word to refer to the net creation of new financial assets won’t accept this. Fine, fine. As long as they’re up-front about their definition, I can adjust. But I personally prefer to use saving in only the micro framework, and I use the difficulty of understanding the identity, the vast potential for confusion, as my main argument for only using it in the micro sense.
@Hellestal
“But I personally prefer to use saving in only the micro framework…”
Wouldn’t you want to be able to add up micro to get macro? What happens to the micro S summation?
Or, if you don’t care about that, fine. But macroeconomics should care about it.
“Why do we need to call it saving?â€
Because (ignoring capital gains), the net worth of a unit increases by the amount of saving in any period.
Change in net worth = saving.
The definition is quite right.
Ramanan,
I assumed from Steve’s closing paragraph that he is asking why we need to call investment saving.
Part of the answer is that its not called saving. They are two different things, only equal in amount, given the proper sector delineation.
@JKH
Oh I see. I read it independently.
Yes in the last para he asks something different than how I interpreted it.
But – although not in the last paragraph – Steve does ask why is saving called saving indirectly and prefers to use what he defines as “money saving” as the right concept for saving.
Ramanan,
It is interesting that (I think) one of the options being described in these discussions is to redefine saving(s) as including only financial assets (I think).
That of course implies that macroeconomic saving is identically zero, and that you have to redefine it that way in order to institute any semblance of micro/macro continuity and consistency.
The interesting point you’ll no doubt recall is that this is the interpretation that flowed logically from the observations you and I were making (several years ago) about Bill Mitchell’s default language on saving as net saving (in the MMT NFA sense).
Okay, we don’t call investment saving.
But we do include all business spending (investment) in the thing we call saving.
Business spending = gross investment
> the net worth of a unit increases by the amount of saving in any period.
We include all of that spending (gross investment) in our measure of saving — both the part that replaces consumed capital (not increasing the unit’s net worth), and the part (net investment) that does add to the stock, increasing net worth.
If I take $100K out of the bank and put $125K in, have I saved $125K, or $25K?
@Ramanan
“prefers to use what he defines as “money saving†as the right concept for saving”
“Money saving” is the ordinary language use of “saving.” Other “saving” is ordinarily called “investment.” Neither of these use of the terms “saving” and “investment” are univocal with the same terms in the macroeconomic sense of “S – I”. Most people don’t know this. This results in the shell game of saving causing investment that is at the basis of the selling the rationale for austerity being “expansionary.”
In order to avoid confusion, I would prefer to see term used univocally in their ordinary and technical use with other technical uses qualified to distinguish them clearly from ordinary language meaning (denotation and connotation). This is essential in order to bring policy discussions and politics, which are expressed in ordinary language or reduced to ordinary language in media reports, conform to ordinary language use, since most politicians and the public presume this to be the meaning. In the absence of clarification, confusion from ambiguity results on one hand, while on the other, deception is perpetrated by purposefully conflating meanings.
@Asymptosis
“But we do include all business spending (investment) in the thing we call saving.”
No. From my comment at the previous post:
– Spending apart from “investment spending†includes all business expenses – including cost of goods sold, cost of labor, cost of capital, and anything else that isn’t capitalized. It’s an income statement item of fundamental heft. I’ve said a number of times now that I would never “call investment savingâ€. That’s not what the definitions and the equations mean at all. They are equations of magnitude – not equations of substance –
Gross investment corresponds to gross saving.
Net investment corresponds to net saving.
“If I take $100K out of the bank and put $125K in, have I saved $125K, or $25K?”
On its own, that’s a flow of funds transaction that in itself says nothing about saving, which is an income statement result. It needs more context.
@Tom Hickey
Tom: “”Money saving†is the ordinary language use of “saving.†Other “saving†is ordinarily called “investment.—
No, it isn’t. Steve wanted to define money saving as the difference between income and expenditure and this is not saving even in the ordinary sense and Steve’s definition wasn’t rightly interpreted by you. Going by your comment ordinary use of saving is the deposits and cash notes acquired in any period which is not Steve’s definition.
@JKH
yes and his double usage of saving as well, within the same context.
@Tom Hickey
I think that making definitional changes on the run is the wrong way to educate people on the paradox of thrift. Its a ruse – and the people who end up being the most powerful (media) communicators will see through it.
Teaching the paradox of thrift is a fundamental challenge that should be engaged within a robust framework for correctly understanding the relationship of investment to saving at the macro level.
@JKH
i.e. in context, the austerity goal of reducing government deficits is in effect a paradox of thrift dynamic – it is a misguided attempt to increase government saving (i.e. reduce government dissaving)
and that’s using the correct definition of saving!
@Ramanan
“No, it isn’t.”
In the US, “saving” in the ordinary language sense is equated with money saving, i.e., cash under the mattress or in banking accounts or the money market. Household funds in residential real estate, equities and similar portfolio items are called investments. If I did not make that clear it is what I meant. Using these terms in other ways results in confusion and deception.
@JKH
I am all ears to learn your clarification of this morass in terms of addressing the issue of bringing economics, finance, and accounting onto the same page and at the same time addressing the communication issues between technical usage and policy usage wrt political discourse and public education. Presently, it seems to be a mess and the beneficiaries are the propagandists and ideologues that exploit the ambiguity of economic terminology and the use of ordinary language connotation, e.g., “saving” good, “debt” bad, portfolio saving is “investment” that creates jobs.
@Tom Hickey
But that is what you think what people think “saving” is.
@JKH
You know that and I know that, but the public is being decieved by the connotation that “saving” including government saving is good and has the same effect (govt as household analogy). The use of this terminology plays into the hands of the austerians.
@Ramanan
Ramanan, that’s just nonsense. I know perfectly well how ordinarily people use saving and investment in the United States. I talk to people across the board from sophisticated people that “save” and “invest,” as well as people that don’t and they all understand the same thing by the terms. It’s also the way it is used in the media. Most people are mystified when they first encountered the economic meaning if they happen to run into it, as shown on the blogs, and when they take econ 101 it has to be explained to them.
@Tom Hickey
People are mystified because people confuse all sorts of things. But people reserving the term saving exclusively for increases in deposits and cash is not the case.
Yes people call purchases of equities etc as “investment” but that doesn’t prove anything about people’s usage of saving
@Tom Hickey
True Tom, but I think positioning an argument based on a redefinition of saving relative to investment might be more awkward than you suspect.
Might be an idea to give that thesis a try.
In other words, do a comment or post that includes two things:
a) a fundamental tweaking of the definition of saving along the lines you suggest
b) an argument using that framing quite specifically as fuel for a new and improved case as to why the Austerians are wrong
As I suggested to Ramanan, I’ve always seen signs in the MMT exposition of this sort of thing, but I don’t think I’ve seen something quite as specific as what I’m suggesting here.
I’m the wrong person to put that together, since I don’t have a problem with the definitions. But somebody from your side might want to give it a shot. Could be interesting.
Or maybe its simpler than I suggest. I don’t know.
@JKH
What you are suggesting is that someone who is not an economist, a financial professional or an account put together a technically correct account that can also overcome the confusion potential of ordinary language denotation and more importantly, connotation? I would say that is virtually an impossible undertaking. It will take a team of people with expertise in economics, finance, and accounting and also public relations and communications to accomplish what is necessary, presupposing that a representational economic model even exists.
As far as I can tell, the MMT economists and financial professionals have done the best job so far in this direction, but they are few, and are also finding how difficult it is to communicate with the media and even financial professionals and other economists owing to the gap of knowledge and accustomed meaning of terms.
This is a huge undertaking and also one of great importance and pressing need.
@JKH: “That of course implies that macroeconomic saving is identically zero”
Right, exactly. You’ve cut to the quick (again) (and you’re memory’s better than mine), and I meant to respond to that over at SRW’s place.
I’ve actually been meaning to write a post for a while titled “The Economy” Can’t “Save”. (I do love using those “so-called” quotes…)
If we adopted that usage, we could of course use other language for real assets/fixed capital. I came up with “accumulation.” And I discovered recently that Marx opted for the same word. (I’m so poorly read…)
So we might say that a unit builds wealth, or net worth, through real-capital accumulation and monetary saving.
It’s precisely at this conceptual juncture of money and real assets that I’ve always struggled (hence my obsession with the nature of value and money), and I don’t think it breaks accounting principles or methods (?) to make that distinction clearer by using intuitive, cognate wording when we’re describing, labeling, the accounting constructs.
This may be untenable. (I’ve broached this thinking to you before, and I don’t think you liked it/thought it made sense.) Do you own a house, for instance, or do you have a deed to the house, giving you claims, rights relative to everyone else? The latter would look a whole lot like a financial asset, as opposed to a real asset.
To take it even further, do you “own” the apples on your kitchen counter, or do you merely have a (unwritten) claim, right to them. (Possession is nine tenths…) Is that claim a financial asset?
This may be off the charts, but it’s been seeming attractive to me as a way of cutting what seems like a gordian conceptual knot.
Sorry to trouble you with my out-there musings…
I feel a strong resistance to speaking the way professional economists want me to speak. That’s because even though all academic practitioners are entitled to define technical jargon however they wish, economists use terms that have some fairly well-established common-sense uses, and then they bend these terms into other technical usages. The bending is not innocent, and is sometimes done to promote policy agendas and fallacious judgments by trading equivocally on the common-sense and technical use at the same time.
I would propose that the way to begin to get some clarity is to start by leaving money entirely out of the analysis, and also by also leaving every kind of exchange out of the process. If we start by trying to classify monetary expenditures and exchange transactions, then we are already way too far down the road. Maybe we should begin instead that with the single, idealized, self-sufficient economic agent of classical economic yore – the farmer. The farmer we imagine to have no money and to forego external exchange of every kind. And yet the farmer has income, and also consumes, invests and saves.
We are trying to classify the kinds of changes that take place in the farmer’s wealth during some period. So we assume there is the stuff the farmer has at the beginning of the period of interest, and there is some stuff the farmer has at the end of the period of interest. During the course of the period the farmer’s stock of stuff changes in various ways. Additions are made to it and subtractions are made from it.
One way in which the farmer’s stock of stuff changes is that some of it is used for various purposes, and destroyed in the course of its being used. He might plant some seeds which germinate. The seeds cease to exist and some plants come to be. He might eat some wheat. The wheat ceases to exist and some health and satisfaction come to be. Some grape juice in barrels might ferment. No more grape juice but wine in its place. These processes, when undertaken deliberately, can be called “spending”, because the input is “spent” in the processes that transform them. Of course, while some things come into existence and others pass away, there may be an underlying substrate that persists throughout. But the value of this substrate for the farmer changes as a result of the various kinds of changes it undergoes.
Conventionally, these processes are divided into two types: consumption and investment. Consumption is supposed to be a final use of a type of wealth in the production of some final achieved good, whereas investment is the using up of the wealth as part of a process leading to the production of something else that may then in turn be invested or consumed. But there is really no sharp distinction between consumption and investment. For example, if you eat a good meal you might think of that eating as at least partly an investment in your laboring body which is in turn part of the process of producing crops.
The portion of the farmer’s wealth that can be used in further production is sometimes called “capital.” But again, there is really no precise distinction between capital goods and consumption goods. If you have some seeds you can consume them, or you can plant them. If you plant them, you are investing them and thus using them as capital.
Another way in which the farmer’s stock of stuff changes is that the farmer acquires new stuff – the farmer’s income. For a farmer, the income might be the harvest of the farmer’s fields and thus the product of the farmer’s own labor interacting with the natural world and his pre-existing capital. But some of the farmer’s income might consist of apples that fall from trees the farmer doesn’t tend, berries that grow on bushes, and rain that falls from the sky into his wells. The farmer might also do work which transforms the value of some of his wealth without destroying the inputs. If the farmer spends a day catching fish from his pond with a net, and putting them in a tub of water near his door, he has added to the value of his stocks by moving it from a less convenient place to a more convenient place, but not added to what is in the stock. Still be can think of that increase in value as a type of income.
Income that is not spent – either by being consumed or by being invested in further production – is thereby saved. Saving is not a kind of spending. It is the opposite of spending. It is making an addition to your stock of stuff. And every kind of spending, then, is the opposite of saving – it is “dissaving.” You can also spend some of your pre-existing stocks. Saving is adding to your stocks, or adding to the value of your stocks, by refraining from spending more than than one’s income. Saving is an ommission or refraining, not a “positive” act in itself.
I haven’t even begun to talk about exchange. Exchange adds another factor into the analysis. If you have a number of farmers engaging in production and barter exchange, then it could be that some good X that is neither consumed or invested by farmer A is exchanged for some other good Y owned initially by farmer B. Farmer B might then consume or invest X while farmer A saves Y. In that case we might think of farmer A’s use of X to procure Y as a kind of saving, since Y is then saved, while farmer B’s use of Y to procure X is an investment or consumption expenditure because X is invested or consumed.
But here’s one thing that should be absolutely clear: it is certainly possible that among the aggregate income of the whole collection of farmers, there are goods that are neither consumed nor invested during the time period, by anybody whether these goods change hands or not. They thus become a net addition to the aggregate stock of wealth that survives into the next period.
And that’s the basis of my big gripe with the standard technical terminology. I see this terminology as embodying a duplicitous rhetorical strategy in the neoclassical tradition to deceive people into believing that all income is either consumed or invested, or that investment – the productive employment of capital – is itself a kind of saving. But it’s not. There is a powerful and clear linguistic intuition attaching to the common word “saving” that ought to be preserved by economists and not perverted. Saving is what you have done with some good at the end of some period if you have not used it up byeither consuming it or by employing it to produce something else. The economists’ habit of identifying S and I in a single sector economy is a three-card-monty routine that makes real saving disappear from analysis and vanish into investment, which is actually one of it’s contraries. They dream up a Pickwickian definition of “saving” that perverts its common sense usage, use the term to swallow up investment, and then do away with the real saving by implicitly assuming it doesn’t exist, and that only consumption and investment exist.
Why do economists and others do this? It might be innocent confusion. But it might also be part of a rhetorical strategy for duping people into ignoring the fact that a portion of our society’s total wealth is inert during any period at which we look, and is simply preserved from period to period; a strategy for duping them into thinking that if the public seizes part of the savings of the wealthy and employs it for a public purpose, they have thereby taken away something that would otherwise have been productively invested.
Now bring in money. Every child intuitively understands the difference between taking some monetary income and putting it in a safe or piggy bank and using it for some further purpose of production or consumption. A lot of economists would have us believe that the safe, as such, no longer exists in any important way, and that all money that individuals save is saved by being exchanged for a financial promise, where the promiser then employs the money productively or to obtain the goods of consumption – or at least that at the end of a chain of intermediate transfers. But the safe still exists. There are, for example, financial assets that consist of nothing else than claims on government emissions of money not connected with any productive process or consumption.
@Asymptosis
Real stuff doesn’t appear in accounting other than in nominal from, generally accepted to be the unit of account, no? Nominal increases in real acquisition and ownership appear on the income statement as profit (loss) = revenue less expenditure, and on the balance sheet as net worth = assets less liabilities.
For any substantial real ownership there is a legal proof of ownership such as a title or a certificate that can be produced in substantiation of the claim. So there is the real property, the legal proof of claim, and the nominal value. Of course, no one is going to contest the apples on your table, but in a bankruptcy or probate proceeding just about all ownership that is significant is involved in claim adjudication and distribution of assets.
Accounting, of course, only deals with the nominal aspect and that is in accordance with rules that might differ across jurisdictions where standards are set. I doubt there is any conclusive argument for natural categories.
JKH, while I agree that it is necessary to unite economics, finance, and accounting in terms of accounting as the basis for stock-flow analysis, I have noticed that many economists do not accept accounting models like Godley models as very relevant to economics, perhaps because they are based on arithmetic and simple algebra and not enough math to make them look like physics. This is even Krugman’s objection to Post Keynesians — ” no model.” Do you have any proposal for dealing with this, or just let them be. The problem is, however, that they own the place.
I should not have used the $125 bank example. I was trying to point out that net investment really does increasing the stock, so is “saving” (or better, accumulation) in some real, intuitive sense (per Ramanan’s definition, for instance). Much of gross investment doesn’t increase the stock, so isn’t saving in the sense Ramanan bruited.
I like Tom’s “This results in the shell game of saving causing investment that is at the basis of the selling the rationale for austerity being “expansionary.—
Because you know I think accounting constructs (and especially the *labeling* of accounting constructs) is rhetorical hence normative.
But was going to express it another way.
If 1. gross investment is equated with saving, 2. all gross investment is business spending, 3. all business spending (aside from taxes, NAFA, etc.) is investment, and 4. households only do consumption spending, you get this kind of rhetorical position:
When businesses spend, they’re investing (SAVING!), building a better America for all Americans!
When households spend, they’re consuming, devouring resources, and depleting America’s future!
cf. Sumner’s wacky “extracting resources from society.” And that’s one very smart economist!
Who gets the political clout out of this labeling of accounting constructs? Kuznets and co. were businessmen, after all…
If saving simply meant income minus expenditures for all units — households and businesses — the rhetorical situation would be different.
More thoughts:
Consumptions spending (which results, by construction, in goods being consumed in the period)
+Consumption of Fixed Capital (being consumed is its sine qua non)
+Additional production of fixed assets (spurred by net investment spending, above and beyond what’s need to replace old stuff)
=
Total production
The first two items are my “gross consumption”
Consumption spending is my “net consumption”
So in real terms:
Gross consumption plus Net Investment = total production
In monetary terms,
Net consumption plus Gross investment = total production
@Asymptosis
I like the distinction between real assets and financial claims. You’re right, I’m not so much a fan of the use of the term ‘claims’ in the way you prefer, although I think I have a sense for how you want to use it.
One of the key issues in understanding macro accounting IMO is that households do not issue financial claims. They have balance sheets analogous to corporations, and they have equity positions on those balance sheets (more commonly called net worth), analogous to corporations. But they do not issue equity financial claims.
In conjunction with that, I think of the household unit as being the ‘end of the line’ in terms of the telescoping or projection of all economic wealth. That is why I like the Fed flow of funds presentation (as opposed to Ramanan’s natural liking of SNA, for example, as I perceive it). And I think its instructive for decomposing the MMT construct of NFA down to the level of businesses and households as the two components of the private sector. The financial claim interface between households and businesses is important in understanding this whole NFA concept at the generic level of optional sector partitionings of the economy.
Regarding the presumed option of eliminating the idea of total macroeconomic saving altogether, with that defined to be zero and subsector saving defined exclusively as NFA imbalances, I’m not sure. I just think that those who propose something along those lines need to be aware that it implies the world saves nothing – literally. Even in the case where you define a ‘global private sector’ and a ‘global government sector’ and a ‘global NFA position’ between those two sectors, it is still a subsector framing of saving. The world saves nothing in that case. That is of course unless one insists that the government can neither save nor dissave – which MMT does in spirit and words. And in that case, global saving would be defined as global private sector saving, consisting entirely of its NFA position with global government. That’s just a bit too normative for me.
Boy, I just walked into it there. Let the pouncing begin.
🙂
@JKH
meant households do not issue equity financial claims
@Tom Hickey
Tom,
I think that a proper structuring of economics should include a coherent relationship between macro and micro in terms of scope, and a coherent embedding of both accounting and finance within the overall subject matter, where finance is considered as a general extension of monetary economics, and accounting is considered critical to both the finance/monetary side of economics and the ‘real’ side. I think its critical to the real side also because I believe a purely imaginary counterfactual barter economics requires accounting construction, and that it is useful to have in the hip pocket a barter counterfactual and accounting for it – mostly as a check on analysis used in real world monetary economics.
I’d view the emphasis on accounting as the most basic of analytic foundations for both finance and economics as analogous to an emphasis on the natural numbers as the beginnings of quantitative analysis of any type.
Differential equations and such become mathematical tools following that. But some approach to accounting is the sine qua non.
Somewhere there’s a nice quote about the economics profession not understanding what its sneering at in its attitude toward accounting. IMO, it is a humorous but tragic example of pseudo-sophistication smothering common sense.
@JKH
“Wouldn’t you want to be able to add up micro to get macro? What happens to the micro S summation?”
It always sums to zero.
@Hellestal
That’s what I thought you meant.
You just have to convince macroeconomics that global saving is zero in that case, as per my other comment above.
@Asymptosis
“So in real terms:
Gross consumption plus Net Investment = total production
In monetary terms,
Net consumption plus Gross investment = total production”
I know you’ve referred to this before, but I haven’t started to focus on it until just now.
Can you tell me why you are categorizing these as real and monetary respectively?
@Dan Kervick
question for thought:
are the meanings of investment and consumption asymmetric in the following sense:
GDP is measured conventionally to include the production of both consumption goods and investment goods
Consumption goods are consumed near term
Investment goods are consumed longer term
So investment goods may be ‘saved’ in that sense
We know what ‘consuming’ means in the real economy sense.
It is an act of consumption.
But do we know what ‘investing’ means in the real economy sense?
What is an act of investment?
As opposed to the production of investment goods, followed by their consumption?
@JKH
That sounds right to me. I wonder what it will take to get mainstream economists to see it this way, when they don’t seem to be phased by their models not seeing the GFC coming.
@Tom Hickey
Yeah, that’s the super ironic dimension of the whole thing – not just that they didn’t see the GFC coming, but that it was a GFC. The GFC as a species of economic upheaval suggest strongly that finance is not sufficiently incorporated within economic thinking – and accounting along with that of course.
On the accounting front, I have no problem acknowledging the brilliance of a Scott Fullwiler comprehensively documenting in objective form the nature of central bank monetary operations and accounting years before the GFC commenced – while mainstream seemed to just start its education on the subject after the GFC unfurled – and its taken them about 5 years to finally get up to some reasonable speed on it – even as they still shout occasional eurekas in discovering stuff that was examined a decade or more ago by MMT and other PKers. You can literally see the pace of their education by examining the arc of various mainstream blogs over that time period.
“Consumption goods are consumed near term
Investment goods are consumed longer term
So investment goods may be ‘saved’ in that sense
We know what ‘consuming’ means in the real economy sense.
It is an act of consumption.
But do we know what ‘investing’ means in the real economy sense?
What is an act of investment?”
JKH, lots of good questions. A few things occur to me:
1. Saving can only be measured with respect to a a time period of interest. Something produced in CY 2013 might be saved into CY 2014, but not CY 2015. Some things are saved for a long time, other things only briefly. To say that some product produced in period X is part of the saving for that period is not to say that it isn’t consumed or invested ever, but only that it is not consumed or invested during that period. (And of course, things can be partly consumed or invested during a period, with the residual saved into the next period.)
2. Consumption doesn’t always occur in the near term relative to the time of production. Obvious examples: wine and scotch. But you might also consume a can of beans that was produced some time ago.
3. Things can be “used up” through waste or degradation, without being either consumed or invested. A fire extinguisher or a medicine might lose potency over time if it is not used, and its value declines. Similarly some things might acquire value over time without any action being taken – like the scotch. So what we want to say is consumed, invested or saved is value.
3. Although some things like a steel press are clearly capital goods and some other things, like a bag of ground coffee, are consumption goods, other things can be used for either consumption or investment. If I have some lumber and use it to build an addition to my business, I am investing it. If I burn it in a bonfire at a party, I am consuming it. So while the distinction between consumption good and capital good is a perfectly fine rough-and-ready distinction, ultimately it is not goods that are the fundamental measure of consumption and investment, but uses of goods.
4. An act of investing is using something in a productive process – a process that leads to the creation of some further product – in a way which degrades some or all of its value. Using things up in ways that generate value but not some other product are “acts of consumption.”
I assume an electric razor is generally regarded as a consumption good. When I use the razor each day I am consuming it. I am slowly “using it up” – employing it in a way which each day generates value, but makes makes the razor slightly less valuable than the day before. But I’m not manufacturing some additional product or service (unless I’m a male model, and we wish to view the daily shaves as an investment of capital in the production of the service I produce.) The same is true in a more obvious way with a bag of coffee beans.
I don’t think things are all that different with investment. If I have a drum of some kind of chemical catalyst and scoop some of it into a tub of milk in my cheese factory, that is analogous to the consumption of the coffee. But this time it’s an investment of the product. If I use a band saw in my business to cut wood for prefabricated furniture, that’s analogous to the use of the razor, but it’s an investment use of the saw.
The problem that I see with the standard accounting is that it is a transaction-based approach that attempts to measure the productive process, and the processes of consumption and investment, by looking at payments for products. Instead of looking at the actual use of the chemical in the paper mill, it looks at the purchase of the chemical, and therefore depends on a somewhat iffy prior classification of goods into consumption goods and capital goods. I think this is a standard problem in economic theory. People start by looking for directly measurable or recordable events and processes that they can use to indirectly measure the processes they really care about. Then they gradually transform the measurement criteria into substitute operational definitions of the processes themselves. Before long they have lost sight of what they are actually trying to describe, and have transferred their attention to the measurement criteria in ways that distort understanding. It’s like a medical scientist who devises a number of thermometers and probes that can be inserted in various places in a human body, and after a while starts to say that metabolism consists in sequences of changes in metallic probes, that a breath consists of an electrical signal through a chest electrode and that a seizure consists in a series of abnormal readings on thermometers and pressure gauges.
Clearly in a world of farmers, each one of whom was self-sufficient and didn’t trade with any other farmers, there would still be labor, income, production, capital, products, investment, saving and consumption. But as I understand the NIPA system, it would basically say nothing is happening economically in such a world, because it doesn’t count something as a product until someone buys it.
@Dan Kervick
“ultimately it is not goods that are the fundamental measure of consumption and investment, but uses of goods”
right – another way of saying that is that the production of equivalent values of consumption goods and investment goods adds equivalently to GDP, but consumption of investment goods (e.g. depreciation) results (at the margin) in decrements to GDP (measured on a net rather than gross basis – I think that may be called net national product along with some other adjustments as well; not sure about the definition) and negative income (since depreciation is a deduction from corporate income, other things equal)
“An act of investing is using something in a productive process”
right – investment ironically in that sense is defined as the consumption of a previously produced investment good. The production of investment goods adds to GDP; investing subtracts from GDP when measured on a net basis and subtracts from income.
“The problem that I see with the standard accounting is that it is a transaction-based approach that attempts to measure the productive process, and the processes of consumption and investment, by looking at payments for products.”
Not entirely – two good examples are in fact capital consumption and in some cases interest. Capital consumption involves no transaction, but reduces GDP (measured on a net basis) and income. Put alternatively, it adds to the difference between normally measured GDP (which is gross) and the income that relates to it. Income is typically less than GDP by the amount of depreciation. See the NIPA table I referred to Steve Roth earlier. And interest on a multi-period financial claim can be internally compounded rather than paid – which becomes income without a transaction.
@Asymptosis
“So in real terms:
Gross consumption plus Net Investment = total production
In monetary terms,
Net consumption plus Gross investment = total productionâ€
One way to test this model is to assume that the only thing happening during a certain period in the economy is capital consumption.
Gross investment is zero. GDP is zero.
Net investment is negative. GDP measured on a net basis (NNP? not sure about this) is negative.
And income is certainly negative when capital consumption is captured in corporate accounting. That is the usual case, and it is also the usual case that aggregate income is less than GDP because of this.
If captured in household accounting somehow, it would more likely be registered as an asset and equity reduction, but that’s a fine point.
So net investment = total production, both of which are negative, if you transform the measure of GDP to a net basis.
Gross investment = total production on a GDP basis, both of which are zero.
Not sure how this translates to a real/monetary distinction. I don’t see that.
Aggregating consumption in the way you propose is OK, provided you account for timing differences. On a real basis, capital consumption is the current period consumption of prior period production, which results in negative current period income at the margin. At the margin, capital consumption is typically equivalent to a deduction from corporate income and retained earnings, other things equal.
@JKH
Here’s another perspective.
GDP includes gross investment. That means it includes the value of current period production of investment goods. And the current period production of investment goods includes embedded costs that reflect factor payments to both capital components and the labour that went into producing those investment goods.
The income that corresponds to GDP reflects not gross but net investment. That means that capital consumption cost in respect of prior period production of investment goods is deducted from the value of current period production.
Contrary to the factor input costs that went into all prior period production of investment goods, current period capital consumption is a hit to capital income exclusively at the margin – it is a deduction from income to capital. As mentioned above, this is equivalent usually to a reduction in corporate income and retained earnings, at the margin. That is consistent with capital consumption being viewed as a ‘non-cash item’ in accounting, because it really ends up being an adjustment to balance sheet asset value and retained earnings, other things equal. There is no transaction associated directly with that.
@Dan Kervick
I should have added that I think modern accounting is definitely designed for a monetary economy.
But that doesn’t mean that you shouldn’t be able to reverse engineer the logic as an application to a counterfactual, imaginary barter economy or a self-sufficient farmer economy.
@Dan Kervick
But we don’t live in an agriculture economy!
“I don’t think things are all that different with investment. ”
It is not investment for the same reason you gave “But I’m not manufacturing some additional product or service”
” People start by looking for directly measurable or recordable events and processes that they can use to indirectly measure the processes they really care about. ”
Yes because it is useful. Higher the income, higher the standard of living.
Truth of life.
Countries with high GDP per capita are generally doing better than countries with low GDP per capita.
@JKH
I don’t understand this part, JKH:
right – investment ironically in that sense is defined as the consumption of a previously produced investment good. The production of investment goods adds to GDP; investing subtracts from GDP when measured on a net basis and subtracts from income.
Investing, in the sense of consuming an investment good in some productive process, destroys some or all of that good, but a new product emerges from the process. Usually that product has a greater value than the input value that is extinguished in the process. That’s why people produce in the first place. So I don’t see why we should say that investing subtracts from GDP in net terms. It might if the investment was a bad choice, but it doesn’t in the usual course of things.
@JKH
I see your point about the reduction to present-period net corporate income due to capital consumption, which is not a transaction, and might involve capital goods produced in an earlier period.
Logically, it would seem that net household income should also reflect the consumption of consumer goods that might have been produced in an earlier period. Does it?
@Ramanan
I’m sorry, but I don’t think I completely follow you. There is no doubt that more prosperous economies tend to produce a large mass of records, including records of transactions, tax returns etc. that can be used to measure those economies. But it is still true that the transactions are not the whole economy, and that the economy involves many wealth-generating and wealth-destroying processes that do not generate records at all.
@Ramanan
… and although we don’t live in an agricultural economy, I think economics strives to develop and employ concepts that can be applied universally, to whatever type of economy exists.
@Dan Kervick
Like what?
@Dan Kervick
About agricultural economy, your point was that in economies where “I do it this for you, you do this for me” doesn’t apply, economic concepts don’t hold but I don’t think it is the pretense of economists to say what they say holds for that world.
@Dan Kervick
I’m being quite specific in the way in which I defined net in this case. You have to be specific in this sort of thing in general, or comprehension chaos ensues.
In this case, for example, Boeing produces an investment good in the form of a passenger jet. This gradually adds to GDP as the value is reflected in various stages of inventory accounting and finally reflected in full when Boeing sells the plane to American Airlines.
From the American Airlines perspective, this is an asset swap. American had nothing to do with the GDP value created in the plane’s production, other things equal.
That it is an investment and that American Airlines is investing is consistent with the transaction being an asset swap – because there is no effect on American’s income statement at the point of purchase.
From day 1, depreciation starts on the Jet, and that hits the income statement of American.
I specified in the general example that this is assumed to be the only thing that happens in the economy. Which means in this specific example that American doesn’t fill the plane with passengers and generates no revenue from its normal business activity.
So the plane sits on the ground, and other things equal, American incurs a loss of income equal to the depreciation charge.
That’s how I’m specifying net – and that would show up at the macro level as a negative net investment result and a negative income result and a GDP result that was also negative when the GDP measure is transformed (and relabelled) to incorporate net investment rather than gross investment.
So I’m separating out the production of the investment good, the act of investing, and the outcome of investing in terms of how the cost of that investment is recovered. Normally, passenger revenue would recover all of the accruing depreciation charge over time, plus all other expenses, including fuel, salaries, and importantly the financing cost when debt is used, etc. etc.
You just have to be very specific about context and definition when using the term ‘net’. No problem in using it in the way you’re using it, but you have to be careful to define it precisely in context so as not to conflict with other potential or previously defined uses of it.
Because I specified that nothing else happens in the economy, you could consider this a failed investment – which shows up as negative income, etc.
@Dan Kervick
In the Fed flow of funds report, Table F8, there is a line called “Consumption of Fixed Capital, Households and Institutions”.
I don’t know how that breaks down, but its currently running at about $ 300 billion as a category.
It’s subtracted in the determination of net saving according to the NIPA definition.
Ramanan may have more colour on this.
About agricultural economy, your point was that in economies where “I do it this for you, you do this for me†doesn’t apply, economic concepts don’t hold but I don’t think it is the pretense of economists to say what they say holds for that world.
Ramanan, what I was aiming at is that even in an economy like ours in which exchanges of goods and services for goods and services clearly does apply, there is a substantial amount of economic activity that is missed if either that is all that you look at, or if you look only exchanges that generate quantifiable transaction records. For example, in our society right now there is a lot of value generating activity – like you and many others producing blog posts that are read by a bunch of people – that might not be measured. Similarly, there is value destroying activity that nobody reports on some document as depreciation. Perhaps there are people whose job it is to attempt to measure this activity and assign value to it. But what do they use? And how much do they capture?
@Dan Kervick “I would propose that the way to begin to get some clarity is to start by leaving money entirely out of the analysis, and also by also leaving every kind of exchange out of the process. If we start by trying to classify monetary expenditures and exchange transactions, then we are already way too far down the road. Maybe we should begin instead that with the single, idealized, self-sufficient economic agent of classical economic yore – the farmer. The farmer we imagine to have no money and to forego external exchange of every kind. And yet the farmer has income, and also consumes, invests and saves.”
Dan, I disagree almost 180 degrees. This, I think, exactly is the failing of much neoclassical thinking, and of the NIPA representation. It tries to model a barter economy of Smithian butchers and bakers, with no bankers — where money is simply a time- and place-shifting veil over barter.
I’m really starting to like a mental model that includes money “saving,” and real-good “accumulation.”
As JKH points out, in this thinking world (money) saving is zero, even while real goods accumulate. All world financial assets are claims against other people, firms, sectors. They net to zero.
It’s at the juncture of these two where almost all the confusion arises. What is money’s relation to real goods? Does the market value of net financial assets represent the value (to humans) of the real-goods stock? (Obviously, only approximately, with wild swings, but generally yes over the long haul.)
I’m going to post some of this over at SRW’s place too.
@JKH
In the Fed flow of funds report, Table F8, there is a line called “Consumption of Fixed Capital, Households and Institutionsâ€.
So I’m assuming that counts only the consumption of things that are classified as household capital – like homes; but not the consumption of consumption goods?
I’m not sure it matters much, but my understanding is that the debate that has sprung up around some earlier statements by some people that taxing capital expenditures or capital gains income was bad and taxing consumption was good, because (i) the former inhibits production and the latter inhibits consumption, and (ii) its bad to inhibit production and good to inhibit consumption.
But this is a pretty simplistic way of looking at the economy. For one thing the whole ultimate point of production is consumption. You consume some wheat and machinery and sugar in the process of producing breakfast cereal, and then you consume breakfast cereal in the process of producing a healthy body, pleasure, the cessation of hunger pangs and whatever other reasons people have for eating cereal. If there is less consumption of cereal and other stuff, then there is less production of both breakfast cereal, and the capital goods that are part of the whole production chain for cereal.
Also, while there might be some social utility in encouraging additional saving of either consumption goods or capital goods, that depends on the current state of the economy; and affects both kinds of good. You can have an economy in which there is currently too much consumption of consumption goods, but also one in which there is currently too little consumption of consumption goods. You can have too much current consumption of capital goods; or too little current consumption of capital goods. There is no single one-size-fits-all policy.
Also, whether a tax inhibits the activity that is taxed really depends on how resilient the demand for that activity is to changes in its cost.
@Asymptosis
I’m just talking about where we start the analysis. Obviously money matters, and so we need to build it in ultimately. But I think in understanding the economy, we need to start with an analysis and understanding of how ultimate and final values are produced, and then build up from there to look at the component process of production and exchange, and understand the various forms of instrumental value that are employed in the production of ultimate value. Money is a component of wealth, but its something that has purely instrumental value as a means to procure other things. It’s value consists in its exchange value entirely.
Why do governments tax in the first place – and demand money for payment rather than payment in kind? It depends on the type of currency the government employs. But for a government like the US they tax not because they absolutely need to acquire previously produced money. As producers of money themselves, they always have the option, at least, of just producing more of it. But if they do that they might – depending on the state of the economy or the way in particular manner in which they emit the additional they produce into the rest of the economy – devalue money already in existence which will thwart the purposes. They need to tax so that they can use the money they can freely produce in order to (ii) invest in public enterprises producing the many goods and services governments produce, or (iii) pay for the public consumption of goods and services, without (iii) degrading the exchange value of the money already in existence to a degree that the value added by (i) and (ii) is entirely offset.
@Dan Kervick
Dan,
Depreciation is measured as consumption of fixed capital.
Writing blogs for free cannot be assigned a value chosen randomly. Hence zero (except that blogging may require hosting on server and hence fees etc).
There has to be a line drawn somewhere. If a man is fishing all day that cannot be said to increase his country’s GDP – even though he may be having the best time.
@JKH
I believe that the IRS requires this be done, in the US at least. No avoiding taxes by barter of any scale that is detectable over time. If one doesn’t do the accounting oneself in order to report gains from barter, the IRS will later as it catches up with those attempting tax avoidance through non-monetary exchange. They also check the accounting on reports of such transactions to detect underreporting through low estimates of value.
@Dan Kervick
Dan, it’s called “the informal economy,” which Robert Neuwirth estimated to be about USD 10T annual on a global basis. See Wikipedia, Informal sector for reference about how economists deal with it.
@Tom Hickey
Informal economy has to be measured by national accountants. They may not be in a position to measure it as well as the formal economy, but that is no criticism of national accounts itself.
@Asymptosis
When thinking about thinking about economics in a monetary economy, I think it is necessary to include on one’s conceptual modeling both what happen wrt “sweat and atoms” and also “money valuation.” For example, falling to do this results in the fallacy known as Say’s “law,” which is at the basis of much thinking about austerity, and “saving causing investment” that is plaguing economic policy today. The importance is illustrated in JKH’s S = I + (S – I) in a monetary economy, for instance. While this is just the outcome of analysis of accounting identities and therefore rather trivial, to miss it is a mistake with great consequences.
At the same time, with the rise of financialization, I think it is also extremely important to look at what is happening wrt to sweat and atoms in order to avoid the thinking that the living standard is improving when what is actually happening is a bunch of rentiers increasing financial wealth without corresponding productive contribution.
Too often economists just look at the nominal data reported in monetary terms and forget about the actual conditions and changes. But jus to look at stuff overlooks the behavior of money as an economic factor influencing actual outcomes.
@Ramanan
“Informal” means doesn’t show up in national accounts. It has to be estimated based data that are not reported in national accounting. That’s why it is called “informal.” There are moves afoot on how to move the informal economies of the various nations onto the books that but hasn’t happened yet. There would have to be agreement among TPTB on the method and rules.
@Dan Kervick
“I’m not sure it matters much, but my understanding is that the debate that has sprung up around some earlier statements by some people that taxing capital expenditures or capital gains income was bad and taxing consumption was good, because (i) the former inhibits production and the latter inhibits consumption, and (ii) its bad to inhibit production and good to inhibit consumption.”
Misses the whole point of taxation. But in a neoclassical model of a capitalistic economy in which the goal is capital formation, it is “correct” iaw Say’s “law” — which is to say the rationale is bonkers.
@Dan Kervick
This is recorded at the level of journal entries that record all transactions in money terms that are related to the actual stuff involved. Items like capital goods consumed over a period are entered as occurring at the close of the period as depreciation. Pretty much everything relevant to economics, accounting and finance as to show up at the level a journal entry first as the point where “sweat and atoms” meets the monetary side of the economy. The idea is to capture everything actual that is relevant in terms of monetary value. While it is true that it’s the actual stuff that is important, it is not directly relevant to economics other than as quantifiable.
@Ramanan
“If a man is fishing all day that cannot be said to increase his country’s GDP – even though he may be having the best time.”
This is where the informal economy comes in. For example, my family lived close to the sea and friends who were avid fishermen would catch more than they could eat for the sport of it and share the surplus through gifting. Gifting create informal social obligations that evoke reciprocation not necessarily in kind. The gifts were not given at least for the most part for economic reasons but they did produce economic results.
@Ramanan
Blogs are just the tip of the iceberg of the vast about of value and disvalue we don’t or can’t measure. Economists might be doing the best they can, but relying on them can be like relying on a guy with sunglasses leading us through a cave.
There has to be a line drawn somewhere. If a man is fishing all day that cannot be said to increase his country’s GDP – even though he may be having the best time.
It’s not juts about having a good time Ram. If a man is fishing all day and catches fish that he brings home, his labor has generated value and added to his family’s welfare. If a million guys are fishing all day and bringing the fish home, their labor is adding to the national income, even if not a single fish is sold in a market.
@Tom Hickey
Well there are many motives for taxation. Promoting or discouraging certain kinds of behavior is one of them. But it’s surely a mistake to think that discouraging consumption is in general a good thing, or in general preferable to discouraging investment.
@Tom Hickey
Tom,
You are mixing several things.
Free work is not added in GDP and shouldn’t be. We live in a money world.
@Dan Kervick
The economy is not a million people catching fish and feeding themselves. It is transactions which makes the economy.
@Ramanan
It’s both. Obviously in our economy, transactions are hugely important, and home production not so much. But it’s not as though home production has vanished entirely as a significant contribution to economic value.
Also, the transactions don’t make the economy. They are part of it. In most transactions, both parties benefit as the negative value for each party of what is surrendered is more than offset by the positive value that party of what is acquired. So the transactions generate a net positive value summed across all agents. But the transactions themselves only add to the value that was created earlier via production.
@Asymptosis
It’s at the juncture of these two where almost all the confusion arises. What is money’s relation to real goods?
Steve, have you read any Schmitt or Cencini?
http://www.quantum-macroeconomics.info/national-economics/
@Dan Kervick
What is the point of increasing production (aggregate supply) and decreasing consumption (aggregate consumption) as an economic principle. The principle of taxing consumption rather than production is based on “build it and they’ll come.” “Build it and they’ll come” only works if “they” can afford the ticket price. This is the fallacy of composition that infects supply side economics. Aggregate demand does count and decreasing by lowering aggregate income or increasing prices as a consumption tax does reduces aggregate demand, which sends a signal to reduce investment. Also the idea that saving causes investment disregard the fact that saving results in demand leakage.
There is a point of taxing away monopoly rent as a principle, and of taxing all consumption including well as firms’ consumption of resources when demand pull inflation threatens, or taxing firm and well as household consumption of energy in a cost-push inflation due to an energy shortage that cannot be met by increasing supply.
@Ramanan
That’s a normative statement that is heavily ideological. See Hernando DeSoto. A lot of people disagree with that POV.
@Ramanan
“The economy is not a million people catching fish and feeding themselves. It is transactions which makes the economy.”
Your neoliberal tendencies are showing.
@Dan Kervick
“Obviously in our economy, transactions are hugely important, and home production not so much. But it’s not as though home production has vanished entirely as a significant contribution to economic value.”
Dan, your neoliberal tendencies are showing too.
@Dan Kervick
Home services are a huge, unmeasured part of an economy. Think of what you’d have to pay if you wanted to outsource raising your kids.
@Tom Hickey
I should qualify what I mean by “neoliberal” here. Neoliberalism is often associated with “privatization,” which is usually thought of as privatizing public resources. But it is a larger project than that. The objective is monetize everything, including all aspect of the informal economy. for example, in developed countries just about everything that women used to do in the informal economy has been monetized. Large firms seek to monetize the public sector and the commons and smaller entrepreneurs seek to monetize everything that can be monetized at the margin. This supposedly leds to “progress” as the nirvana of the new religion.
@Tom Hickey
No ideology because GDP as defined is defined to measure certain things.
Zero addition to unpaid work in GDP.
@Tom Hickey
“Your neoliberal tendencies are showing.”
He he. Someone doesn’t agree – say he is neoliberal.
@Dan Kervick
“I’m just talking about where we start the analysis.”
This reminded me of something.
You may be aware of a post I did titled “Contingent Institutional Approach … etc.”.
It was basically a way of analysing the monetary system.
It contrasted with (among other things) Scott Fullwiler’s ‘General Case’ approach, in large part due to the selection of the starting point. Scott is quite philosophical and principled about why he considers his approach the correct one.
A third example is Godley/Lavoie 2006/12. They use the lovely Latin phrase “in medias res”, as a description of their starting point.
Just an observation about how different people think about first approaches to big picture, complex subject matters.
@Asymptosis
“This, I think, exactly is the failing of … the NIPA representation”
Forgive me, dear host, as I think I’ve made this point before.
I think you are expecting too much from NIPA.
NIPA is a macro income statement – and the income statement is one of 3 required statements in a complete set of accounting records.
And if you examine the early tables in the Fed flow of funds presentation, note that NIPA is included at summary level as a reconciled subset of the flow of funds.
And that doesn’t differ a whole lot from the approach taken by Godley/Lavoie with their integrated “transaction matrix”.
Please don’t make the part the enemy of the whole.
🙂
@Ramanan
“No ideology because GDP as defined is defined to measure certain things. Zero addition to unpaid work in GDP.”
That’s a normative decision that is now being contested as non-representational of the actual facts.
Here’s the problem in a nutshell. Quantification loses, ignores, whatever, a lot of the qualitative aspects of life that are non-trivial, or at least a whole lot of folks think they are non-trivial. Moreover, quantification by price in economic exchange loses, ignores, whatever, a lot of actual economic data. So on two huge counts the current measure of national output is seriously deficient. The push for substituting “gross national happiness” for gross national product is evidence of the push back against what a lot of folks take to be a normative and ideological attitude toward economics that biases the field toward desired outcomes that disadvantage a lot of people.
@JKH
“Just an observation about how different people think about first approaches to big picture, complex subject matters.”
“A small mistake in the beginning becomes a great one by the end.” — Aquinas in De ente et essentia, paraphrasing Aristotle.
@Tom Hickey
🙂
I’ll keep that in mind
@Tom Hickey
The measure is not deficient. Higher the per capita GDP, better is the quality of life generally in comparison to other nations.
Of course this is not the only thing because other economic data such as distribution of income and wealth are important.
Of course that doesn’t mean one should be obsessed with GDP but generally speaking it is a good measure.
But it is useless to arbitrarily assign some values to unpaid work. That is not to say that they are unimportant. A parent teaching his/her child is useful but there is no way it is going into the GDP.
There is a huge amount of self-consistency checks/requirements in national accounts. Such complaints have been made since long but no unpaid work in GDP.
If you have an alternate system – make a thesis and convince everyone why it is better.
“push for substituting “gross national happiness†for gross national product is evidence of the push back against what a lot of folks take to be a normative and ideological attitude toward economics that biases the field toward desired outcomes that disadvantage a lot of people.”
Strange view.
That isn’t so. If the US GDP increases at a better rate than now, more people will be employed. (Isn’t always the case because of distribution effects so one needs to say this carefully) but generally true.
@Ramanan
“GDP, better is the quality of life generally in comparison to other nations. Of course this is not the only thing because other economic data such as distribution of income and wealth are important. Of course that doesn’t mean one should be obsessed with GDP but generally speaking it is a good measure.”
GDP is not a good measure of quality of life independently, and used as such it is highly misleading. However, economists, but not other social scientists, tend to rely chiefly on GDP as the measure of national prosperity regardless of distributional effects and sociological data.
Many Americans traveling abroad for the first time are amazed at the quality of life in other countries, having believed the propaganda about “American exceptionalism” and knowing the the US has the largest economy (measured by GDP).They are also shocked when they discover that the USD doesn’t give them superior purchasing power either. The American middle class didn’t pay too much attention to the lower class either, until the possibility that they could slip into it very quickly became a stark reality. The income figures are more startling since they show that half the population lives either in poverty or very near the defined level wrt public assistance — Romney’s 47% of “takers.”
@Ramanan
“If the US GDP increases at a better rate than now, more people will be employed. (Isn’t always the case because of distribution effects so one needs to say this carefully) but generally true.”
What actually happening here in the US is that American firms are adding predominantly low wage-no benefit jobs as the widely watched U3 unemployment rate “improves” marginally and the participation rate drops.
@Tom Hickey
Advanced nations have higher GDP per capita compared to poorer nations.
GDP is also income. Higher income = More happiness.
“What actually happening here in the US is that American firms are adding predominantly low wage-no benefit jobs as the widely watched U3 unemployment rate “improves†marginally and the participation rate drops.”
Don’t know what it means. If you are thinking of a situation in which unemployment is reducing without GDP rising, then that just redistributes income.
I think you have a wrong enemy (GDP).
@Tom Hickey
Making quantification the enemy is pretty consistent with functional finance.
Functional finance identifies some sort of inflation risk threshold, but it’s a reckless approach to the actual management of inflation risk.
You don’t wait to hit the brakes until your car is airborne over the cliff you’ve just driven over.
That’s not an argument for austerity – but it is a factor for some semblance of forward consideration and risk management over the long term.
On the touchy-feely comprehensiveness of GDP as a measure – don’t make the part the enemy of the whole.
@Ramanan
“Higher income = More happiness.”
Bentham’s utility calculus. Disproved by psychological research. “Happiness” increases to a point, about 80K in the US, afterwards not.
@JKH
“Don’t know what it means. If you are thinking of a situation in which unemployment is reducing without GDP rising, then that just redistributes income.”
Over the last several decades in the US, GDP has been increasing along with corporate profits while labor share has been stagnant and good jobs have been increasingly replaced by bad.
@JKH
The qualitative-quantitative distinction has nothing much to do with MMT or PKE specifically. It’s a standard criticism of “scientifically based” policy approaches v. humanistic.
@Tom Hickey
Tom, I think you are criticizing for the sake of criticism. Poor means very low income for a long time. Unemployment means no income for some period. For employment to improve and to improve the standards, GDP has to rise. Now it is not always the case that rising levels lead to improvement because it also matters what the distribution is like.
A country such as Bangladesh cannot have higher standards of living without GDP rising. Now this is not the only thing but it is one of the factors for cross country comparison and for policy action.
It is also true that people start selling such as “look at India’s growth rate… 6% … 7% … 8%” and it gives an incorrect picture of what is happening because inequality may actually not be addressed and more humanistic approach is needed as you say.
Whatever said, it is not a criticism of GDP. National accounts is not a right-wing creation. You cannot add unpaid work to GDP and give empathy to the poor.
@Ramanan
What I am saying about quality-quantity is what a lot of heterodox economists have been saying going back to Marx and many of them said it independently of Marx. The criticism is that neoclassical economics takes out the quality and leaves everything in terms of efficient use of scarce resources and neoliberalism makes a political platform out of this that favors the quantitive appraoch of laissez-faire as the optimal way to maximize Bentham’s utility calculus though market forces, i.e, value (quality) equated with price (quantity). A whole lot of people call BS on this assumption.
Veblen and Boulding are examples. In his recent interview reported at Business Insider, Jeremy Grantham gives a shout out to Boulding as “one of my new heroes.” Incidentally, Randy Wray published a review of Boulding’s Reconstruction of Macroeconomics in 1997.
Moreover, management science recognized the importance of the quality-quantity distinction long ago. Just as Skinner’s rigid behaviorism was tempered in psychology by Abraham Maslow’s pioneering of humanistic and transpersonal psychology, so too management science was influenced by works like Maslow’s Eupsychian Management, integrated by Drucker and Deming.
“I know: there’s (at least apparent) confusion in some of these, but that’s rather my point. And there are answers to all of these in the context of S=I.â€
Isn’t S defined here as income (Y) minus consumption (C) and I as spending to create fixed assets and inventory?
When the term “investment†is used, don’t people need to distinguish between investment (NIPA definition) and investment as financial assets (bonds, stocks, other)?”
“When you pay someone to build you a drill press, you’re saving. When you don’t eat some of this year’s corn crop, you’re saving. When you pay off some of your money debt, you’re saving. When you don’t spend some of the money in your checking account, you’re saving. Each of these is true within a given (usually implicit) balance-sheet/income-statement accounting construct. But are they anything like the same thing?”
If S = Y – C, then all those are saving, but they are different.
1) is saving then investing (NIPA definition)
2) is saving then investing (NIPA definition) in inventories
3) is saving then investing (financial investing) to pay down debt
4) is saving then investing (financial investing) in the MOE/MOA
I think you need a 5) where 5) is saving and then investing (financial investing) in a financial asset (bond, stock, real estate, other).
I consider the most interesting case to be where saving in the MOE/MOA = Y – C – I.
Entities then try to decide which financial asset will give them the best return and financially invest in it.
“As I showed in my last post, f you look at the “real†domestic private sector — households and nonfinancial businesses (most people’s implicit default context) — the amount of saving (income minus expenditures) has absolutely no relationship to the amount of investment spending. Saving is always insufficient to “fund†investment. And the changes in the two measures don’t move together, either in magnitude or direction. (Aside from the long, multi-decadal growth in both as the economy grows.)”
It seems to me you have deaggregated (domestic private sector). Isn’t S = I not deaggregated?
“When you pay someone to write a piece of software, you get a long-lived real asset. You’ve saved.”
I think this person saved and then dissaved (invested in the software).
“I’m not sure this really solves the problem, but I’d like to suggest that saving should mean what everybody in a monetary economy means when they use the word: money saving. Monetary income minus money expenditures. In dollars, or whatever.”
In S = I, I think S = Y – C.
In your scenario,
saving = saving in the MOE/MOA = Y – C – I.
“(And while we’re about it, when you take out a loan or spend out of your savings, let’s call those “borrowing†and “spending,†not “dissaving.â€)”
I consider those 2 scenarios to be different.
@Tom Hickey
Again I say you are mixing several things.
@Ramanan
“Again I say you are mixing several things.”
And again I say you are leaving important things out. The growth as GDP and efficiency of capital as policy narrative implies that a rising tide lifts all boats (“trickle down”). Data shows that it does not necessarily do so, and often not only does not, but also as a policy assumption it actually makes some people worse off, sometimes a lot of them, but they are not powerful enough to have a voice. This is persistent issue in economics of development, but it is also an issue in developed countries — certainly the US with its permanent underclass with more people falling into it rather than are rising out of it.
It was the king of Bhutan that proposed that gross national happiness is more important than GDP and that the measures of happiness were not only economics. The idea has taken off and not only in the Global South.
@Tom Hickey
I am sorry Tom. You completely miss the point. The MMT obsession simply deficit spend has prevented you from learning things.
“The growth as GDP and efficiency of capital as policy narrative implies that a rising tide lifts all boats (“trickle downâ€). ”
These two are different things. Neoclassical theory says efficiency of capital and the narrative of the production function are important things for growth but that is a fake story.
But that doesn’t prove that GDP growth is bad.
The neoclassical point that output is determined by supply side factors is wrong and incorrect but that doesn’t mean strong growth of output is bad. For a poor country, to reduce poverty higher output is needed. One doesn’t have to wait for supply side factors or depend on them to make progress and the causalities of a good theory of growth are quite different from neoclassical ones.
As I see it you are mixing various things and critiquing 1 right + 4 wrongs instead of just critiquing 4 wrongs. And right now you are focused one critiquing that 1 right.
A poor nation becoming rich necessarily needs to have a higher income. The other side of GDP is income.
“It was the king of Bhutan that proposed that gross national happiness is more important than GDP and that the measures of happiness were not only economics. The idea has taken off and not only in the Global South.”
Yes I’ve heard. Sounds brilliant but is faulty.
If you deny growth of GDP is important – you are left with one alternative: simple redistribution of income.
@Ramanan
I am afraid that you are not critiquing what I said. I though that I made clear that this is not an MMT position that I know of, although perhaps some MMT economists may hold it. I don’t know.
I am not saying that GDP is unimportant either. I am saying that a lot of people, heterodox economists, politicians generally on the left, sociologists and other social scientists involved in policy criticize the neoclassical assumption that are imported into neoliberalism is the dominant policy determinant.
Not to see this and appreciate the arguments is to fall into the neoliberal trap. This is one aspect of “the new economic thinking” that is widely being called for today as necessary.
@Tom Hickey
I mentioned MMT because there is a tendency to overcriticize there. I understand that your claims are necessarily the same as that of the Neochartalists.
Neoliberal growth strategies have cracks all over but that doesn’t mean growth of output per se is bad.
I am not going to accept any argument that measures such as GDP per capita etc are bad. It is as bad as “money doesn’t buy happiness” argument because money buys happiness.
@Ramanan
Oops typo … should be … “your claims aren’t necessarily”
@Ramanan
“I am not going to accept any argument that measures such as GDP per capita etc are bad. It is as bad as “money doesn’t buy happiness†argument because money buys happiness.”
As I said, you have neoliberal tendencies. 🙂
Look, using GDP as a data point in policy making is not “bad.” Using it as the one one or the most important one ignores a range of issues that tip the scale heavily toward the interest of capital.
Everything in proper perspective, and that means putting people first rather than money in the belief that money buys happiness. It doesn’t, although it is a factor in material satisfaction. Material satisfaction is neither the whole of happiness nor the most significant factor, as utility theory assumes. People who think money buys happiness are the problem, which is fundamentally their own problem, because they won’t find happiness in material acquisition and enjoyments, and will be forever dissatisfied, always wanting more and more, and projecting their psychological abnormality on others to the degree they have any influence or control over others.
See the April 16th post at Unlearning Economics, “The Dangers of Thinking Like an Economist.” BTW, psych studies reveal that people become less empathetic after taking even econ 101. Most of what passes for economics is a soul-destroyer.
@Tom Hickey
Oh, and I view MMT as a compromise with the devil in this regard, as I have said many times. So please don’t attribute my views to MMT. Even Kenneth Boulding was willing to compromise too much in my view.
@Tom Hickey
“As I said, you have neoliberal tendencies.”
Truth of life. Get used to it! Nothing neoliberal about it.
What is poverty? It is defined so that people with very low incomes are considered poor. There is absolutely no other way of defining it.
“Look, using GDP as a data point in policy making is not “bad.†Using it as the one one or the most important one ignores a range of issues that tip the scale heavily toward the interest of capital.”
But it is important. Your point comes down to arguing that two nations with the same real output needn’t have the same level of happiness but it just means that there are other factors. If you look at it as a factor analysis you will realize more. This is because incomes across nations is vastly different and the income effect takes over.
What about Unlearning Economics’ post? I love the blog but there is nothing there which is inconsistent with what I wrote.
You are imagining a fantasy world where everyone is equal and economic things don’t matter.
You have it all wrong.
@Ramanan
“”You have it all wrong.”
And you are a neoliberal. You could at least have argued for Kaldor-Hicks efficiency.
@Tom Hickey
Lol.
The point is you are associating the phrases “GDP”, “growth” and “GDP growth” with neoliberalism.
Kaldor-Hicks efficiency and things like that are second order discussions.
Kaldor was the leader in the “endogenous growth theory” and things as such. Kaldor also had a book called “Causes of stagnation and growth”.
You are confusing several things. For a poor nation such as Bangadesh and for that matter my own (India), the way to come out of poverty is growth in real output. There is no alternative. Of course it also matters how the distribution of income is and so on, but you seem to be denying the former vehemently.
The trouble with Neoliberalism is that the Neoliberal policies come with a strong deflationary bias.
@Ramanan
the way to come out of poverty is growth in real output. There is no alternative. Of course it also matters how the distribution of income is and so on, but you seem to be denying the former vehemently.
I am not at all denying that effective and efficient deployment of real resources to produce what a society desires in aggregate is important for achieving prosperity. What I am saying is that neoliberalism is a political stance based on an economic one that favors “liberalization.” It assumes that GPP is the best measure of aggregate “utility” and capital is the chief factor in producing growth, therefore efficiency of capital, which presumes economic liberalism is the chief priority in policy, let the chips all where they may. So policy effectiveness is equated with efficiency assumed to be Pareto efficiency, because everyone is at least as well off as they were and most better off, since a rising tide floats all boats. This, of course, is used to justify all sorts of thievery, corruption, and rent-seeking, in the name of liberalization and meritocracy, which assumes privatization and monetization of everything that can be monetized. Neoliberalism leaves those privileged by wealth and influence actually free in the sense of being able to exert greater control and choice, and everyone else only notionally free. That some are freer than other do to the invisible hand of the free market is just as much BS as the political dogma that some are better than other because they have better blood. This concerns more than distribution of income and wealth, although the fact that a few thousand families own the bulk of global wealth says something those distributional arrangements that closely resemble oligarchy and feudalism.
“The trouble with Neoliberalism is that the Neoliberal policies come with a strong deflationary bias.”
Yes, that’s obvious since savers and investors have to be able to count on money being worth at least as much later for gains to be real. When the efficiency of capital is foremost the monetary system is run for in the interests of capital.
But would hardly call deflationary bias the chief weakness of neoliberalism.
@Tom Hickey
“It assumes that GPP is the best measure of aggregate “utility†and capital is the chief factor in producing growth, therefore efficiency of capital, which presumes economic liberalism is the chief priority in policy, let the chips all where they may.”
While it assumes that output is determined by supply side factors and that is wrong, you are overcritiquing it to include criticism of GDP itself.
Plus it goes on to give a fantasy description such as Pareto optimality and so on as you rightly say.
But this post has none of those things except matters of national accounts which by itself doesn’t talk of things such as Pareto nonsense. I don’t know why such things sneaked it.
Now whichever school of thought one espouses, at a minimum output should grow sufficiently fast so that people have higher incomes, consume more and so on. Of course that is not a state of nirvana but it is still needed. The error of Neoliberalism is not the stress in growth of output itself but policies which are deadly for the world as a whole. But Post-Keynesians offer a supreme alternative and the whole of economics profession can be thrown in garbage.
But none of the critiques of neoliberalism can be applied to national accounts itself. Economists are poor in understanding national accounts and the field is different from mainstream itself.
But somehow you seem to extrapolate the criticism of neoliberalism to foundations of national accounts itself. You are overcritiquing.
Now you may have something to say about the concepts of national accounts itself but please do not mix it with criticisms of neoliberalism. It makes it look as if you have made a good critique of both when in fact you have critiqued only one.
@Ramanan
Two points on economic and financial data skewed by neoliberal bias. One involves externalities like unemployment and environmental degradation and their costs, and the other involves transaction costs, which are largely unrecognized as Coase pointed out. Labor is commoditized, treating human beings as means rather than recognizing their value as ends, the environment assumed to be a free resource, and simply appropriated, and the narrative of the free market as guarantor of price efficiency is based on cultural myth like the creations stories of various religions — non-empirical and contradicted by ignoring externalities. It’s a fairy story, or deus ex machina, only it is dressed up in numbers.
@JKH
“One of the key issues in understanding macro accounting IMO is that households do not issue financial claims. They have balance sheets analogous to corporations, and they have equity positions on those balance sheets (more commonly called net worth), analogous to corporations. But they do not issue equity financial claims.”
I agree that households don’t issue stock/equity, but why isn’t debt considered a financial claim?
If the lower and middle class actually had a stock/stock price, would the stock price be at a low level? Would some entity analyzing it say this stock has too little income and too much debt?
@Fed Up
“I agree that households don’t issue stock/equity, but why isn’t debt considered a financial claim?”
Interesting point now that household debt is being securitized.
“I agree that households don’t issue stock/equity, but why isn’t debt considered a financial claim?â€
read further – I immediately corrected the phrasing at # 34
yes, debt is a financial claim
@JKH
Oops! Sorry about that. Didn’t read #34.
@Tom Hickey
Whatever said and done, adding unpaid work to GDP is adding smokescreen and creating a sense of well being. It’s mainstream economists who crib about national accountants not adding this. Too bad you fell into the trap. “… deceived by economists” in Joan Robinson’s language.
@Ramanan
“adding unpaid work to GDP”
Again, you are imputing things I did not say. I said that when economists presume that GDP is either the standard for measuring prosperity or the chief factor involved, they are making an unwarranted assumption because there are relevant factor that GDP doesn’t reflect.
For instance, the proposed quantitative-qualitative metric of Gross National Happiness is a measure separate from GDP.
What I am saying is that economics gives only a partial picture and when it is is used exclusively or chiefly in policy discussion and for policy formulation, as neoliberals are wont to do since the bias is toward capital, then policy debate and decision making are biased away from human considerations toward financial and industrial capital interests.
The assertion that growth measured by GDP equates with national prosperity and therefore happiness aka “the greatest good for the greatest number” in terms of Bentham’s utility calculus is neoliberal sophistry.
@Tom Hickey
EQUATES? Oh please. Dismiss the extreme view and claimed to have dismissed the concept of GDP itself.
@Ramanan
Ramanan, your refusal to respond to what I am actually saying shows your neoliberal tendencies and it is obvious we are at a dead-end on this track. So let’s shift the ball into your court since I am the one accusing you of neoliberal tendencies by sticking exclusively or primarily to quantitative economic data as determined institutionally at present.
What is your non-neoliberal solution to the quantity-quality issue, and how would you address the informal economy, or are you sticking with the neoliberal answer and dismissing all this a irrelevant to national accounting because it is not presently included, irrelevant to macro since it does not figure into GDP and therefore irrelevant to policy formulation, which should be based on economic efficiency? So far, I an unclear on your position and it seems to me that you are agreeing with the neoclassical economic and neoliberal political viewpoint. Show me I’m wrong.
For example, I just posted a link to a call for the World Bank to include human rights in their policy and they requested advice about the value added of human rights from econometricians and economists, who could not find any value added. So human rights have no value? If value is equated with market price, that is the conclusion. What is your positon on that issue?
@Tom Hickey
I am talking to a highly confused man.
You have nothing else to say other than repeatedly calling me neoliberal. Honestly it is abusive even though it doesn’t affect me at all because I am not and more importantly because I clearly see through your errors.
“neoliberal tendencies and it is obvious we are at a dead-end on this track”
Whether neoliberals are running the economy or whether heteredox economists are, nations’ difference in quality of life will first be measured by things such as GDP per capita. True it is not the only thing and things such as distribution of income etc are important. Other things such as how sustainable it is and whether growth has been achieved at the cost of deteriorating balance of payments are also important.
There are various alternative measures but none of them prove that national accounting concepts are not useful.
Keep throwing the phrase neoliberal again and again.
As far as your point about informal economy is concerned, the informal sector should come under measurement.
” dismissing all this a irrelevant to national accounting ”
Seriously, when did I say that?
Again points to the total confusion you have on issues such as this.
“So far, I an unclear on your position and it seems to me that you are agreeing with the neoclassical economic and neoliberal political viewpoint. Show me I’m wrong.”
Oh man!
Again you are mixing issues such as saying that the mainstream economics view is that GDP is supply-side determined but how is it relevant?
Look if you want to prove that Bhutan is a more prosperous nation than the United States we can have the theological debate later.
But … you started a Holier Than Thou debate long back.
FINALLY …
“and how would you address the informal economy, or are you sticking with the neoliberal answer and dismissing all this a irrelevant to national accounting ”
What a gem! Clearly you have zero knowledge of the whole thing.
@Ramanan
OK. You have convicted yourself by resorting to ad hominem when asked to state your position. Game over. You lost.
@Tom Hickey
Agreed. Tom Hickey is Holier Than Ramanan!
@Ramanan
Clever. You won in the end. Congratulations. 🙂
Entertaining, but I still would like a better understaning of S and I.
@pebird
On the way…
@Asymptosis
http://www.youtube.com/watch?v=sZrgxHvNNUc
🙂
“money saving. Monetary income minus money expenditures.” Isn’t this called “profit” in the normal world?