In the olden days, economists used to talk about the trade cycle. (They meant a cycle in the amount of all trade, not just international trade). They meant a cycle in the amount of exchange. There are fluctuations over time in the amount of buying and selling that people do. In a boom, trade speeds up; and in a recession, trade slows down.
I think we should resurrect that old term. Thinking about the trade cycle is a better way of thinking about short run macroeconomics than how we currently think about it. Nowadays we don't talk about fluctuations in trade; instead we talk about fluctuations in output. It's not the same thing. We are wrong; the old guys were right. Somewhere, maybe around the 1920's or 1930's (I wish I were better at history of thought) macroeconomics took a wrong turn.
This post is a follow-up to my previous post.
Macroeconomics took a wrong turn when macroeconomists started out their analysis with I=S. Wicksell, the Austrians, Keynes, New Keynesians, and many more besides, all start out with I=S. They all started out in the wrong place. "(Desired) investment" means the (desired) amount of newly-produced capital goods and services. "(Desired) saving" means income from output of newly-produced goods and services minus the (desired) amount of newly-produced consumption goods and services. Is I=S the right way to start thinking about short run macroeconomics? Only if you think that short run macroeconomics is about fluctuations in the output of newly-produced goods and services. If you think that short run macroeconomics is about the trade cycle, then I=S is a bad place to start.
Thinking about fluctuations in output is both too narrow and too broad a way of thinking about fluctuations. And that way of thinking about the question to be answered also distorts the sort of theoretical framework we use to answer it.
Another old term for the subject matter of short run macroeconomics is the "conjuncture". It means a coming together. This word has almost disappeared from economics in English, but it survives in French, Spanish, German, Russian, and maybe other languages too. Short run macroeconomic fluctuations are a conjuncture. A lot of different data series tend to move together cyclically. Lucas drew attention to the conjuncture in his 1975 paper "Understanding Business Cycles". He said that business cycles have different amplitudes and frequencies, and it is only the conjuncture (co-movements) of different things moving together cyclically that allows us to say that all business cycles are alike, and so possibly amenable to a common explanation. If each episode were unique, we couldn't really have a business cycle theory. We would have one theory for the 1982 recession, a different theory for the 1991 recession, and so on. And each theory would have just one data point, so it wouldn't really be a testable theory.
Fluctuations in the output of newly-produced goods and services is a bad proxy for the conjuncture. It is both too narrow and too broad. The trade cycle is a better proxy for the conjuncture.
It is too narrow because it ignores trade in goods that are not newly-produced. Things like old houses and old cars and old furniture and old land.
It is too broad because it includes production of goods and services for one's own use. The unemployed worker is not unemployed. He is employed digging his own garden, fixing his own car, doing his own labour market search. He is not unhappy because he is unemployed. He is unhappy because he is self-employed and doesn't want to be. He wants to sell his labour to someone else, but can't, so has to consume it himself. A recession is not a fall in employment; it is a fall in the amount of employment that is traded. A recession is not a fall in output; it is a fall in the amount of output that is traded.
We could even imagine an economy in which employment would rise in a recession. You might have to work a lot harder to grow your own food to feed yourself than if you could sell your labour and buy food.
A house with nobody living in it is unemployed. A house with somebody living in it, who wants to live somewhere else, but can't sell his house, might as well be unemployed. If something disrupts trade in old houses, so owner-occupiers are living in the wrong houses, and consuming the wrong housing services, because they can't trade, that is a recession in housing. It's just like workers who want to trade their labour but can't, and so are consuming the wrong labour services, their own, when they would rather be trading and consuming someone else's labour services. Comparative advantage, and all that.
A recession is not a drop in output and employment. A recession is a failure to exploit the gains from trade.
Microeconomists start out thinking about trade. And not just trade in newly-produced goods and services. Macroeconomists ought to start out thinking about trade. And not just trade in newly-produced goods and services. Trade is supposed to make people better off. If something makes trade harder, and reduces the amount of trade, that would make people worse off. Maybe that's why people seem to be worse off in a recession. It's because there's less trade. And not just less trade in newly-produced goods and services.
Now, what might that something be? What could cause trade to fall and make people worse off? An increase in transportation costs? Nope. An increase in marginal tax rates? Nope. Those make theoretical sense, but don't work empirically to explain recessions.
The obvious candidate is a shortage of the medium of exchange. If there were a shortage of shopping bags, all trade that required shopping bags would be disrupted, and people would be worse off. If there were a shortage of money, all trade that required money would be disrupted, and people would be worse off. Nearly all trade requires money. The exceptions, barter trades, merely prove the rule. As far as I can tell, barter increases in a recession. People resort to barter, where they can, because there's a shortage of money. But trying to trade without money is like trying to carry stuff home from the supermarket without a shopping bag. It's not as good, so you buy less stuff, and you buy different stuff, and it's very inconvenient.
But somewhere macroeconomics took a wrong turn. We started thinking about the output of newly-produced goods and services, instead of the trade cycle. So macroeconomists started thinking about the demand and supply of newly-produced goods and services, not about trade. So they wrote down "I=S" as their equilibrium condition, and started thinking about what determined desired investment and saving. And they focused on the real rate of interest, defined as the relative price of current newly-produced goods to future newly-produced goods.
If you start out by asking the wrong question, your answer will be wrong, even if it looks right. "What causes fluctuations in the output of newly-produced goods and services?" is the wrong question to ask. "Investment, saving, and the rate of interest" is the wrong answer, because it is an answer to the wrong question.
It's a bit like defining recessions as fluctuations in the output of cars, and explaining the business cycle in terms of the demand and supply of cars, and the relative price of cars. Then trying to explain everything else that happens in business cycles as a side-effect of the fluctuating output of cars.
"What causes fluctuations in the amount of monetary trade?" is the right question to ask. "Money" is the right answer, because it is an answer to the right question.
Worthwhile Canadian Initiative 
Kevin: “A cyclical downturn comes when lenders are suspicious. It’s not money that’s scarce, it’s trust”. What kind of trust do you mean by this? Surely not the trust that sun will rise again tomorrow, or trust in your wife. The only kind of trust that comes to my mind in this relation is trust that creditor in general will have sufficient income in the future to pay the installment on time. An their ability to so relies on their ability to sell their labor – or as Nick says in this post – even on their ability to trade some of their old assets on the market. And if in recession it is harder to sell anything on the market “because of money” (as Nick claims), then ultimately, it is the money hiding behind the scarcity of trust of yours.
@J.V. Dubois: …if in recession it is harder to sell anything on the market “because of money” (as Nick claims)….
But Nick’s claim is just what I’m disputing. I’m living amidst the wreckage of the Irish economy and I really don’t see that the changes I’ve witnessed have much to do with money, as such. They have a lot to do with the fact that people who were having loans thrust upon them a few years ago by eager bankers now have no chance of obtaining a mortgage. Nick wants the problem to be about money. That’s what makes him a monetarist. If he wanted it to be about sin he’d be a Calvinist.
@reason: thanks.
J.V. Dubois
Yes – but this may have another cause than money. Maybe the future looks more uncertain than it did. (O.K. We can then argue that this is because the central bank is not agressive enough in managing expectation and isn’t responding appropriately to a rise in the precautionary demand for money. This is all getting very chicken and eggish to me.) I think the key in the end is that both fiscal policy and monetary policy are not distributionally neutral in their effects and the we actually care deeply about distributional effects. But I’ll just hide in the corner so both sides can keep being distracted and pretend they are only arguing about countercyclical policy.
See, I think fiscal policy is just another variant of monetary policy with different distributional implications.
Nick:
“Don’t we see a decline in sales of both perishable and non-perishable goods in a recession?”
We see a decline in sales of those non-perishables whose value is largely in the services they provide for current consumption (cars, household appliances, etc.), because people are trying to shift their consumption to the future. A car may not be very perishable, but the services it provides are perishable. So if you wanted to drive more 5 years from now but not today, you wouldn’t buy a new car and leave it in your garage for 5 years.
Compared to money, though, even a physical car is perishable, in the sense that it’s costly to maintain and loses value over time even if you don’t drive it very much. There aren’t many goods that retain 94% of their value after 3 years — especially in risk-adjusted terms. Depending on how you do the risk adjustment, I’m not sure I can think of any non-financial goods that rise to that level of non-perishability. And the things that come close aren’t necessarily hard to sell during a recession. (Looking at what the price of gold has done recently, I don’t imagine that jewelry has been hard to sell.)
Reason: “See, I think fiscal policy is just another variant of monetary policy with different distributional implications” – I am with you on this. And I think Nick and other Market Monetarists would agree too. Macro should be about preventing the fluctuation of Aggregate Demand (and output) in a way which has the lowest negative impact on the long-term growth. Using monetary policy based on the transactions with government bonds fits this role perfectly as it is government who actually decides the redistributive effects, the role of the CB is just to be there to stop things getting so ugly that the stability of the system itself (and thus even the long-term prospects) are in danger. The “funny” thing right now is that by “doing nothing” monetary policy now actually has larger redistributive effect than before. Since we are in a liquidity trap and major Cetral Banks refuse to use “unconventional” monetary policies, the real interest rate is artificially high. This means that they decided to pick a side of creditors over debtors just by not doing enough.
Kevin: Do you find it easier to think that “trust” and not “money” is the culprit wreaking havoc in your country and all over the world? “Trust” is too close to “morality” for me, with potential to steer the discussion back to “we all sinned by taking too much debt and therefore now must suffer the consequences” fatalism that is taking hold especially in Europe.
J.V. Dubois,
Fair point, I’d sooner refer to credit rationing. All I’m saying is that Nick is too eager to make the medium of exchange the focus of attention. To my mind the place to start doing macro is what Keynes calls the state of long-term expectations. That’s what changes when the economy has what Krugman calls a Wile E. Coyote moment.
I have a question. Yes, one could define Y=C+I as present output = currently produced consumption goods + currently produced investment goods. But one could also define Y as total traded (presently produced and previously produced) goods = total traded consumption goods plus total traded investment (capital) goods. Then the identity S=I holds, as does the natural rate concept, Austrian business cycle, IS-LM model, etc.
AdamP:
“Yes, and most importantly the BMW/Skoda premium presumably is to a certain extent a difference in production costs.”
It’s backwards: high premium on Bimmers enables BMW to make them in Germany. Though “made in Germany” may signals high-quality and so justify the price.
Kevin Donoghue:
“Nick wants the problem to be about money. That’s what makes him a monetarist. If he wanted it to be about sin he’d be a Calvinist.”
Or the daughter. of an East German Lutheran pastor.
Nick, You said;
“A recession is not a drop in output and employment. A recession is a failure to exploit the gains from trade.”
I’m not quite willing to buy into this. I’m happy saying it’s not a fall in output, although in a sense it is, as an inability to exploit the gains from trade will reduce output. I’d prefer to use employment, market employment if you want to avoid the gardening problem. A recession is a reduction in hours worked for pay.
There are lots of things that reduce gains from trade (like occupational licensing laws) that don’t necessarily cause recessions. They may just divert labor into less productive areas. In that case GDP is lower but employment is not lower, and there’s no recession even though:
1. GDP is lower than otherwise.
2. There are fewer gains from trade.
So given a choice between output, market employment, and gains from trade, I’ll take market employment.
@Jacques and Ken Donoghue:
Original Sin and Man’s Sinful Nature (inherent tendency to sin more often then not) is a pan-Christian concept. The Roman Catholic Church is as much into these doctrinal concepts as anyone else. The specifically Calvinist spin is Total Depravity, which is that man is unable to prevent himself from sinning without the saving Grace of God.
This tiptoe through the TULIPs has been brought to you by Determinant, WCI resident Calvinist.
Scott: suppose the government banned overtime. Or held a compulsory lottery where the winners had to take a forced holiday from paid work. Or banned women working outside the home. We wouldn’t call that a recession. And it wouldn’t look like a recession, except for market employment falling. We wouldn’t see excess supply and a fall in trade across the whole economy.
(Which makes me think: RBC gets the wrong answer, primarily because it asks the wrong question, just like everyone else.)
James: if you redefine I and S that way, then existing theories of what determines I and S would no longer be applicable. So you end up in the same place.
Andy: “We see a decline in sales of those non-perishables whose value is largely in the services they provide for current consumption (cars, household appliances, etc.), because people are trying to shift their consumption to the future.”
Let me highlight that “… because people are trying to shift their consumption to the future.” bit.
If you start out from the new goods/I=S perspective, then you will see recessions in exactly that way. “They must be caused by people trying to shift their expenditure into the future”. I disagree. Take my old house example. When people try to trade old houses, they aren’t all trying to shift their expenditure into the future. They are each trying to shift from one house to a different house. But nobody can sell, because nobody will buy. A multilateral barter/house swap could solve the problem, in principle.
“When people try to trade old houses, they aren’t all trying to shift their expenditure into the future. They are each trying to shift from one house to a different house. But nobody can sell, because nobody will buy. A multilateral barter/house swap could solve the problem, in principle.”
Nick, this is going in circles. Why then is everybody trying to increase their money balances? (Because they want to consume more in the future, perhaps?)
Reason,
“What you are saying effectively is we should increase exports.”
If that’s how you obtain that different currency, yes. I would however say more generally that you need to trade. The original point was however is that it is transaction costs that prevent people from switching to different currencies rather than a literal excess demand for money.
I sincerely believe that any supply of money is optimal as long as people can bargain without transaction costs. The trouble is that they can’t and that’s why you need a nominal target to mimick what people would agree to otherwise in a world of ‘zero transaction costs’.
In other words you need a monetary policy to make neoclassical micro approximately true. I made a similar comment referring to Alfred Marshall’s assumption of a stable monetary unit in his principals on Lars’ blog. http://marketmonetarist.com/2011/12/23/how-i-would-like-teach-econ-101/#comment-1691
I believe both Nick and Scott made a similar point in the past about a monetary policy to make Say’s law (I believe they meant Say’s identity, then again I’ll defer to their knowledge on this, after all I believe in specialization) to be approximately true.
Martin: we did mean Say’s Law, not Say’s Identity. An identity is true by definition. Say’s law is a statement about the world that may or may not be true. It won’t be true if monetary policy is bad. It will be true (or approximately true) if monetary policy is good. We want a monetary system where supply really does create its own demand.
“I sincerely believe that any supply of money is optimal as long as people can bargain without transaction costs”
“In other words you need a monetary policy to make neoclassical micro approximately true.”
That’s asking a little bit too much, in both cases. But yes, that’s the direction in which we want to go.
Nick,
What I meant is that you want all excess demands to sum to zero by definition through the use of monetary policy. That is Say’s Identity (I am of course assuming the absence any other transaction costs, apart from those associated with an excess demand for money).
Say’s law on the other hand is always true regardless of monetary policy as it does not say that all excess demands will sum to zero by definition. Say’s Law, (as is Stigler’s version of the Coase Theorem), is that all excess demands will sum to zero in the absence of transaction costs.
Say’s law simply means that you need to reprice all goods, including money, to make all excess demands sum to zero.
That’s how I understand that distinction anyway.
Martin: OK. There are about 101 different definitions of Say’s Law/Identity out there!
Haha yes I know, but this one is the correct one :P.
Brilliant insight! I would never have thought of ‘money’, but now that John Stuart Mill said it in 1829, it’s obviously right!
😉
And Nick, you are brilliant. 🙂
I think another aspect of it is that Stiglitz thinks it’s better to deal with the structural issues with massive increases in education (how about free bachelor’s degree and preschool), infrastructure, alternative energy, basic science and medicine, etc., then to constantly deal with the unemployment, decade after decade, with low real interest rates producing huge consumer spending and McMansion building.
Richard, Stiglitz’s “solutions” are the standard pious centrist crap, the economic equivalent of eating more vegetables and exercising more. It’s what you advocate when you don’t have any real ideas.
Putting huge money into extremely high return public investments is a very real solution. I wish we could be so real. Although, yes, it won’t solve every problem. There are other things we should do too.
Nick: “Now, what might that something be? What could cause trade to fall and make people worse off? An increase in transportation costs? Nope. An increase in marginal tax rates? Nope. Those make theoretical sense, but don’t work empirically to explain recessions. The obvious candidate is a shortage of the medium of exchange. .”
This was an enjoyable post and sparked some good comments. Economics is much more intuitive to me if it is about trade, not output. Ad hoc divisions between old and new goods seem odd to me too.
My question is, what is your empirical evidence that recessions are better explained by monetary phenomenon and not non-monetary phenomenon like transportation costs?
however imho money can be broken down into an even more fundamental variable that guides trades. that would be information, information itself is not the only thing that moves trades and in fact money is probably the best representation of the variable of information (in a concrete-ish format). when one can then model money as an exchange of information i think one can start building models with a very real and immanent representation of (yeah money). this makes no sense probably but it does to me so f*k it.
JP Koning,
If I may answer this.
If transportation costs were the reason, what would you expect to see? I for example would expect to see high prices for inputs used in transportation as a result of the high cost for transportation itself. However, gas prices are low.
Or as you can see in this graph:
http://research.stlouisfed.org/fredgraph.png?g=41z
As you can see economic activity and demand for energy move together (this is also used to check Chinese growth: one looks at the electricity consumption), it follows that when economic activity collapses the demand for energy will collapse and as a result its price will drop.
I like this post Nick. Ive been thinking for days how to respond and there are so many points to address I hope youll excuse the format of my reply.
” Thinking about the trade cycle is a better way of thinking about short run macroeconomics than how we currently think about it. Nowadays we don’t talk about fluctuations in trade; instead we talk about fluctuations in output. It’s not the same thing. We are wrong; the old guys were right. Somewhere, maybe around the 1920’s or 1930’s (I wish I were better at history of thought) macroeconomics took a wrong turn.”
We dont call it trade, but fluctuations in sales is what we experience, sales are just trades involving money. GDP is sales, employment is dependent on sales
Is I=S the right way to start thinking about short run macroeconomics? Only if you think that short run macroeconomics is about fluctuations in the output of newly-produced goods and services. If you think that short run macroeconomics is about the trade cycle, then I=S is a bad place to start.
Thinking about fluctuations in output is both too narrow and too broad a way of thinking about fluctuations. And that way of thinking about the question to be answered also distorts the sort of theoretical framework we use to answer it.”
So you obviously think that in the LONG RUN the output of newly produced goods and services is important. But isnt the long run just a succession of short runs? I think economists go wrong when they talk about short and long runs. If you think its important for an economy to develop NEW goods and services in the long run the place to start that is in the short run. I can imagine an economy where nothing breaks down and so nothing new needs to be produced. There would be no ” I ” in this economy and this economy would not be a capitalist economy. So are we examining non capitalist economies now?
“Fluctuations in the output of newly-produced goods and services is a bad proxy for the conjuncture. It is both too narrow and too broad. The trade cycle is a better proxy for the conjuncture. It is too narrow because it ignores trade in goods that are not newly-produced. Things like old houses and old cars and old furniture and old land.
It is too broad because it includes production of goods and services for one’s own use.”
I wasnt aware that my buddy who sells used cars doesnt count towards GDP. He certainly counts towards employment though. So if he were to hire more employees it could occur without a concomitant increase in GDP because his “sales” dont count? I wasnt aware of that. I agree that something needs to account for this activity somehow.
“The unemployed worker is not unemployed. He is employed digging his own garden, fixing his own car, doing his own labour market search. He is not unhappy because he is unemployed. He is unhappy because he is self-employed and doesn’t want to be. He wants to sell his labour to someone else, but can’t, so has to consume it himself. A recession is not a fall in employment; it is a fall in the amount of employment that is traded. A recession is not a fall in output; it is a fall in the amount of output that is traded.”
This is unnecessary and smacks of the “workers just want a vacation” argument that gets trotted out by some Tea Partiers. A full wheelbarrow load of crap. A recession is when sales go down and the falling sales leads employers to lay off workers cuz they dont need as many. LAY OFF workers, not a general strike or early retirement. There is no need to try and “redefine “unemployment. Everyone knows what it is if they have been unemployed.
“Microeconomists start out thinking about trade. And not just trade in newly-produced goods and services. Macroeconomists ought to start out thinking about trade. And not just trade in newly-produced goods and services. Trade is supposed to make people better off. If something makes trade harder, and reduces the amount of trade, that would make people worse off. Maybe that’s why people seem to be worse off in a recession. It’s because there’s less trade. And not just less trade in newly-produced goods and services.”
I think its more accurate to say that macro economists look at the overall end result of all that micro trading. What happened in sum is the question macro economists are asking. And in capitalist economies if no one created anything new and people just reshuffled around used stuff we call it “nothing happening”. Is this bad? No But its not a capitalist economy if nothing is happening to create new stuff.
“But somewhere macroeconomics took a wrong turn. We started thinking about the output of newly-produced goods and services, instead of the trade cycle. So macroeconomists started thinking about the demand and supply of newly-produced goods and services, not about trade. So they wrote down “I=S” as their equilibrium condition, and started thinking about what determined desired investment and saving. And they focused on the real rate of interest, defined as the relative price of current newly-produced goods to future newly-produced goods.”
That happened when we wanted to know when a capitalist economy was doing its job so to speak.
“”What causes fluctuations in the amount of monetary trade?” is the right question to ask. “Money” is the right answer, because it is an answer to the right question.”
Yes and unless there is INvestment to inject new money into the economy, there will be no new money. The investment must produce something new though or else its just chasing already produced goods and driving up prices
So I think I=S is the right place to start with a capitalist economy that wants new production
“Now, what might that something be? What could cause trade to fall and make people worse off? An increase in transportation costs? Nope. An increase in marginal tax rates? Nope. Those make theoretical sense, but don’t work empirically to explain recessions”
At least you’re rulling out the ideology that the Great Depression happened when Herbert Hoover raised the top marginal tax rate like Jude Wanniski, et al.
This talk of a shortage in money makes me think of the MMTers who say our fiat money is government monoploy “token” money. I guess you wouldn’t see it that way? Money as a government monopoly-if the currency is a fiat currency?
Thanks Min 🙂
Richard: “Putting huge money into extremely high return public investments is a very real solution.”
You don’t need the “extremely”. Putting money into high return public investments (assuming they are indeed high return) is a good thing to do anyway, regardless of the state of the trade cycle. We shouldn’t have to be adjusting public investments up and down according to the state of the trade cycle. We shouldn’t be stopping high return public investments just because the economy is booming. We shouldn’t be starting low/negative return public investments just because the economy is slumping. Fiscal policy has got its own job to do; monetary policy’s job is to deal with the trade cycle.
(There’s a slight exception to this, though it’s not really an exception: if real interest rates are low, for whatever reason, then the rate of return on more public investments will exceed the market rate of interest, and those investments should go ahead.)
Daniel: actually, that does sort of make sense. You can view money as a token that captures information on trades. If an individual holds $100, that means he has sold goods worth $100 more than the goods he has bought. It’s a way to keep track of how much each person owes or is owed by the system, without needing some central accounting system.
JP: Thanks!
“My question is, what is your empirical evidence that recessions are better explained by monetary phenomenon and not non-monetary phenomenon like transportation costs?”
That’s the right question. I think about it at odd intervals. I don’t have any absolutely conclusive empirical evidence. Just that the monetary hypothesis seems to fit the facts, and others, like transportation costs, don’t seem to.
1. When the volume of trade declines, it is usually harder than normal to sell goods, and easier than normal to buy goods. (It’s easier than normal to sell money, and harder than normal to buy money.) That strongly suggests a monetary cause. It’s hard to think of other causes that would have that implication. That is the one big empirical fact that is very salient to me.
2. I believe that barter is countercyclical (and that competing monies like LETS etc. are also countercyclical). If I knew for sure that was an empirical fact, I think it would be very salient.
3. None of the other candidates look good. Or, they might work for one recession, but don’t work for others, so all those “special explanations” are very ad hoc.
4. Using historical methods, a la Friedman and Schwartz, we can sometimes identify monetary shocks, and they seem to have the predicted effects.
Mike: “At least you’re rulling out the ideology that the Great Depression happened when Herbert Hoover raised the top marginal tax rate like Jude Wanniski, et al.”
Yep. For two reasons:
1. If you try hard enough, you can always find some such “explanation” for any given recession. There’s always something that changed, that might cause a recession. But those “explanations” are all ad hoc. It’s different every time. And they ignore the cases where marginal tax rates increase, and there isn’t a recession. Stiglitz’s “explanation” also looks ad hoc to me.
2. If you increase marginal tax rates, and that reduces the supply of labour, and the supply of goods, you should see excess demand for goods, and rising prices. It doesn’t fit the facts.
“This talk of a shortage in money makes me think of the MMTers who say our fiat money is government monoploy “token” money. I guess you wouldn’t see it that way? Money as a government monopoly-if the currency is a fiat currency?”
I do see it the same way, roughly speaking. Money doesn’t necessarily have to be a government monopoly, but in most (all?) countries today, most money is either government money, or (like bank money) is convertible on demand into government money, and so is linked to government money.
James@01:56PM:”But one could also define Y as total traded (presently produced and previously produced) goods = total traded consumption goods plus total traded investment (capital) goods. Then the identity S=I holds, as does the natural rate concept, Austrian business cycle, IS-LM model, etc.”
Nick@02:24AM:”if you redefine I and S that way, then existing theories of what determines I and S would no longer be applicable. So you end up in the same place.”
I don’t think redefining I and S that way affects that much. When we learn about national accounts in Japan, “Principle of equivalent of three aspects” is always on the front. (BTW, by googling, I found that that principle seems to be popular only in Japan.) That principle can be expressed as:
GDP(Gross Domestic Production) = GDI(Gross Domestic Income) = GDE(Gross Domestic Expenditure)
I think I=S theory mainly concerns GDI=GDE aspect of that principle, and doesn’t make much difference whether GDP is actually GDT(Gross Domestic Trade) or GDNP(Gross Domestic New Production), as long as it captures value-addition reasonably well, one way or another. (Perferct capture is impossible in any case, as other commenters have noted.)
himaginary: but GDP, GDI, and GDE are all measuring the same thing: production of new goods and services.
(It’s not just in Japan, by the way. There are three ways of measuring the same thing: measure the new goods produced; measure the income from new goods produced; measure the expenditure on new goods produced. And if you count everything correctly, and make the appropriate adjustments, you should get the same number in each of the three ways.)
himaginary:
to add to Nick. Every textbook has it. Usually in chapter 5 or 6…
Retreating into commenting as the nephews and nieces are agreed that uncles are soo boring discussing situation in Europe…
Martin,
Thanks. I was wondering what the specific empirical evidence would be proving the monetary nature of recessions rather than what disproves the non-monetary case. Is Nick referring to the empirical claim that, in a recession, it gets harder than normal to sell stuff, and easier than normal to buy stuff?
Sorry for not being quite clear about what I meant by “popular in Japan” in my previous comment. I was referring to the particular keyword of “Principle of equivalent of three aspects” (or “sanmen-touka-no-gensoku” in Japanese). Of course the notion expressed by that keyword itself is basic economics.
“Of course the notion expressed by that keyword itself is basic economics.”
That said, whether catchy keyword is permeated among people or not may determine the influence of the notion expressed by that keyword, at least to some extent…
himaginary:
After a quick search, it seems that Japanese are deriving some policy conclusions from that boring accounting identity that we don’t.
You have Hayek wrong. Hw doesn’t start out with I = S defined as newly produced capital goods.
Hayekmis all about the changing structure of the allocation of both old and new production goods.
Quite right,I=S leaves a lot to be desired. It implies a closed economy, so it might be time for a refresher course in international economics and finance, for understanding the current Eurozone financial crisis, for example.
In open economies, both large and small, any domestic stimulus, in the form of fiscal policy or easier credit, can drain away into higher imports and external debt, as happened with the “cash for clunkers” programs in hapless and helpless countries such as Ireland and Portugal.
For a view on the limits of trade divergence and the adjustment challenges facing the fragile Eurozone peripheral economies, “economic midgets with one policy arm tied behind their back”, see the econoblog PPP Lusofonia, http://ppplusofonia.blogspot.com/2011/12/eurozone-crisis-tests-limits-of.html
Nick, I’m a bit late on this one, came via Daniel Kuehn’s blog.
(http://factsandotherstubbornthings.blogspot.com/2012/01/cant-let-this-one-slip-by.html#comment-form)
You said: “The trade cycle is a better proxy for the conjuncture.”
Does this mean you are a bit closer to Kling’s Patterns of Sustainable Specialization and Trade (PSST)?
JP: I’m not sure. I don’t think that follows.