Scott Sumner Does Not Understand that S ≠ I

Update April 4: Steve Waldman kindly links to this post, and I’m rather abashed that he does because it’s wrong as written. As pointed out by Ramanan. (Though the spirit is right.) I should have said:

Private Domestic Nonfinancial (i.e. households and businesses, a.k.a. the “real” economy in which people produce, sell, and buy goods and services that are consumed to produce human utility) Saving ≠ Private Domestic Nonfinancial Investment

Because other sectors exist. Sliced one way: Domestic Financial + Fed Gov + International (financial and non-). (One can argue which sector the Fed should be placed in.) And there are massive flows of funds between these sectors and the Private Domestic Nonfinancial sector.

And: those other sectors can (do) create new financial assets, notably bank deposits, which is how the cumulative surplus from production gets monetized over time.

The Scott Sumners and John Cochranes of this world seem to think that S=I for the “private” economy. And it’s unclear what’s included in their imagined private economy. (The financial sector? the International sector? They’re both “private.”). Their failure to understand or address the sectoral accounting makes their S=I thinking completely muddled.

That’s what I meant to say. Here’s what I said:

He expresses befuddlement at Steve Randy Waldman’s typically brilliant post, K is not capital, L is not labor.

S equals I (and properly understood, I = E) only in an imaginary private sector of producers/consumers with no financial sector, no government sector, no international sector, no lending, and no borrowing — really a barter economy in which not consuming corn is “saving.”

This is the walled-off imaginary sector constructed by Kuznets and company in the ’30s and embodied in the National Income and Product Accounts — NIPAs. (It was only properly supplemented years later with Flow of Funds accounting incorporating other sectors properly.) By necessity they had to construct it as if (to quote Garrett Jones). “Everything you delay gratification for is capital.” (I would add: “real” capital.)

This is basic sectoral accounting, a subject in which neoclassical (and “market monetarist”) economists seem to have received no training.

Cross-posted at Angry Bear.







2 responses to “Scott Sumner Does Not Understand that S ≠ I”

  1. The Arthurian Avatar
    The Arthurian

    I understood or perhaps misunderstood Keynes to say that saving always equals investment because if demand is less than supply (the difference being savings), then there is unsold output — which is counted as investment.

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