I mean the concept, not the activity. Because it's the most confusing concept in macroeconomics.
Let's take a very simple macro model with no exports, imports, government spending, or taxes. There are four goods: a flow of newly-produced consumption goods C; a flow of newly-produced investment goods I; a stock of antique furniture A; and a stock of money M.
It's a monetary exchange economy. There are three markets: a market for C; a market for I; a market for A; and that is it. There is no market for M. Or rather, all the other three markets are markets for M, because all the other three goods can only be bought and sold for M. Barter is banned.
There is a tabu against using the C and I you have produced yourself. You can only use the C and I you have bought from someone else. So you want to sell the C and I you produce, and buy the C and I someone else has produced.
Just to keep it simple, there are no unsold inventories of C and I. You only produce C and I when a buyer appears with money and wants to buy some of your produce. Think of C and I as services, or goods made to order.
Income Y is defined as C+I. Y=C+I is true by definition.
Saving S is defined as Y-C. So C+S=Y is true by definition.
Therefore S=I is also true by definition. It follows immediately from C+S=Y=C+I, when you subtract C from both sides.
These all refer to actual quantities produced, bought and sold. All of that was accounting. Notice that A and M appear nowhere in those accounting identities.
This is the bit that people may miss: all of that was only true at the aggregate level. At the aggregate level it is true that income from the sale of C+I must equal expenditure on C+I. The aggregate quantity of C+I sold must equal the aggregate quantity of C+I bought. If an apple is sold, it must be bought. But that is not true at the individual level.
Let's repeat the accounting at the individual level.
An individual's income y, from the c+i that individual sold to someone else, can be used to buy c from someone else, or else saved s. What can an individual do with his flow of saving? In this model there are three things he can do with his income [I meant saving]: buy investment goods i; buy a flow of antique furniture delta(a) to add to his existing stock; hoard a flow of money delta(m) to add to his existing stock.
An individual's saving means anything he does with his income except spend it on newly-produced consumption.
Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don't know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don't know which. And it really matters which. As I shall show.
That's why "saving" should be abolished.
Having got that accounting out of the way, let's start thinking about Keynesian macroeconomics.
"What is the effect of an increase in desired saving by all individuals?"
What a badly-posed question. We know they all want to buy less consumption goods, but what of those three possible things do they want to do more of? The question does not say. So lets take all three in turn.
1. Investment. Demand for newly-produced consumption goods falls and demand for newly-produced investment goods rises by an equal amount. Total demand for newly-produced goods stays the same. So it's a wash. (Hush, you microeconomists, and Austrians!) No recession.
2. Antique furniture. Demand for newly-produced consumption goods falls, and demand for a flow of antique furniture increases by an equal amount. What happens?
This one's a bit tricky. To keep it simple, let's assume a representative agent model where everyone is identical so there is no trade in antique furniture in equilibrium. If everyone wants to buy more antique furniture, and nobody wants to sell, there's excess demand for antiques. What happens next?
Either the price of antique furniture rises to clear the market or it doesn't. If it rises to clear the market each individual will stop wanting to buy more antique furniture and will reformulate his plans. If it doesn't rise to clear the market each individual will be unable to buy more antique furniture (because none will find a willing seller) and will reformulate his plans. Either way he will reformulate his plans. He either chooses not to buy more antiques or can't buy more antiques, and so must do something else with his income instead.
If he reformulates his plans and decides to increase desired consumption back again there is no recession.
If he reformulates his plans and decides to increase desired investment there is no recession.
If he reformulates his plans and decides to hoard more money, see below.
3. Money. Demand for newly-produced consumption goods falls and demand for a flow of more money increases by an equal amount. Each individual wants his stock of money to be increasing over time.
Money is the medium of exchange in this economy. That makes it very different from antiques. If you want to increase your stock of antiques, you must persuade someone else to sell some of his. It's not something you can do by yourself. If you want to increase your stock of money, you just buy less. Nobody can stop you buying less. There's a recession.
You see? Even in this incredibly simple stylised economy, to talk about the effects of an increase in desired saving is incredibly confusing. All because saving is a non-thing. It can mean any one of three things, even in this incredibly simple stylised economy. And those three things have to be analysed in three very different ways and have very different consequences.
That's why "saving" should be abolished. Talk about something else instead. Talk about a switch away from desired consumption into more desired something else, and specify what that something else is. Because it matters.
Worthwhile Canadian Initiative 
rjw: “We could not have chosen an analytical category more prone to cause confusion if we had tried. I’m all for getting the concept out of economics, and instead focussing on consumption and investment, where the scope for confusion, while far from zero, is rather less.”
Yep! And then, just like in micro, we can distinguish three concepts:
1. Qd. Quantity of apples demanded (desired/planned/ex ante purchases by buyers)
2. Qs. Quantity of apples supplied (desired/planned/ex ante sales by sellers)
3. Q. Actual quantity traded/bought-and-sold/transacted.
Add that Q = min{Qd.Qs} in “semi-equilibrium” of keynesian macro.
Add that Q=Qd=Qs in full market-clearing equilibrium.
And money, the medium of exchange, is then the only good that is weird, because it doesn’t have a market of its own.
Bill: “You are correct that saving isn’t a thing, but rather a difference, but saving implies an increase in net worth. You must accumulate assets or reduce debts. Most of these things impact financial markets in ways that pretty directly impact prices and yields (though maybe not antiques.) Accumulating money balances, or paying off debts in a way that reduces the quantity of money don’t have that effect and that is a source of difficulty.”
Let’s focus on that “(though maybe not antiques.)” bit.
Most macroeconomists have a model in mind where the good that is neither money nor newly-produced is called “bonds”. My model here calls it “antique furniture” instead. That’s a metaphor for old houses, cars, land, etc., etc.. Which is most important empirically? It’s not obvious. Bonds net to zero (except for unborn generations 😉 ). But even if we look at gross bonds, antique furniture is usually bigger than bonds. The average house is worth roughly 3 times annual income of the family living in it.
Nick: I did not mean that “money” should be abolished from the actual economy, just as a analytical concept in economics (Like you obviously did not mean that actual savings should be abolished – whatever that would mean).
If you e.g. want to lower interest rates or the rate of return on personal savings – say so instead of demanding “lose monetary policy”.
Steve Roth: “Damn this is sounding remarkably familiar. ;-)”
Actually, I think it has more in common with some of your old posts, and our old discussions, than with MMT.
“The stock of [net NR] financial assets can only increase or decrease via government deficit surplus, or net imports/exports. MMT World.”
That’s not (just) the MMT world. That same identity crops up in one form or another in every model that has financial assets.
Consider 3 periods and 3 alternative scenarios. You have just spent money on diesel oil, some land, corn kernels & some pine cones. You are indifferent between eating corn kernels and pine nuts.
(1) The first scenario is the unchanging scenario, a savings scenario, the one like the pattern of the past.
You use the corn kernels to plant the land with corn and harvest and eat it later in the season, and you use the diesel oil in the process. You eat the pine nuts now.
(2) in the second scenario is the consumption scenario, you immediately eat the corn kernels, you pour the diesel oil on the land and have a big slip and slide party leaving the land indefinitely unusable, and you let the kids boil the pine cones in a pots pretending to make soup.
(3) is another savings scenario, an alternative savings scenario. In this 3rd scenario you plant the pine nuts onto the land, which you harvest decades from now and use to build log houses, using up your diesel oil in the process. You eat your corn kernels now.
Assume all of these processes require the same labor.
In both 1 and 3 you save exactly the same dollar spent. In scenario 2 you consume those dollars rather than save.
But note well, in scenario (2) you will have much more to consumer in 6 months compared to period (3) when the corn is ready, and must less to consume and decades from now when the houses are ready.
If you are taking a backwards looking / dollar input perspective on “savings” as macroeconomists do, using the backwards looking value theory handed to them by Ricardo and Keynes, you miss the differences savings the differences in choices between scenario (1) and (3) represent — macroeconomists simply put value from the past accounted in dollars into Ricardo/Keynes value theory machine and extrude it out in a linear fashion at a later point in the future.
It’s as if the revolution in value theory of Menger, Jevons and Walras had never happened …
Nick, I agree with you that the conversation on debt was mainly about categorizations and the lack of standardized terms associated with categorizations. That made it very frustrating to follow.
So I am all in favor of standardizing terms, as you advocate in this post.
I noticed you originally introduced C and I as flows and A and M as stocks. Then when you brought in the individual’s economy, you introduced not a stock of antique furniture, but a flow of antiques, and not a stock of money, but a flow of money. Presumably you did this to preserve stock flow consistency.
The idea of a flow of antiques or money is very unintuitive to me. Why not go the other way? Not flows of consumption and investment, but stocks? Thus you have and individual’s goods C, I, A, and M, which are all stocks. Sum them all up and you have S (the noun form of S, not the verb). This S can rise or fall. As a solution to the Borgian categorization problem, this configuration makes more intuitive sense to me.
Nick:
OK, but new houses are close substitutes for old houses.
New cars are close substitutes for used cars.
Now, there are some “used cars” that are in great shape and 50 or 100 years old. New cars aren’t good substitutes for the antiques.
Heck, here in Charleston I am sure there are people whose heart is set on living in a historic single house downtown–or perhaps having one of the mansions along the battery. Can’t make more of those.
But how big are those specialty markets?
(Or maybe I didn’t get your point. Are we back to discussing who monetary disquilibrium can interfere with people moving between houses?)
Extremely helpful, Nick. Thanks!
Nick,
Since my comment got lost in all this (frankly, quite trivial) Wittgensteinian angst, I will just repeat it.
People who want to hoard money hoard it by adding to the short term liabilities (and cash) of the banking system.
But this does not ensure that the money is hoarded. The bank also has to want to hoard it (to the extent that banks have desires). Or to fail to find interested borrowers.
So there are 3 variables beyond the increased money demand at work. The risk appetite of the bank, the demand for borrowing and the regulatory capital ratios.
So, isn’t it more correct to say that a recession is caused by inadequate credit demand or failure of intermediation rather than an increase in money demand (to the extent that all monetary economists seem to use ’cause’ and ‘last link in a long chain’ almost interchangeably) ?
JP, but if we think of income as a flow, then thinking of C and I as stocks is going to create problems. We are going to need either a delta or an integral somewhere. I don’t have a problem in thinking about my annual net acquisitions of antiques!
Bill: “(Or maybe I didn’t get your point. Are we back to discussing who monetary disquilibrium can interfere with people moving between houses?)”
I wasn’t back on that moving between houses point. I deliberately ruled that out by assuming no trade in antiques in equilibrium.
Will think more on your point.
Ritwik: “So, isn’t it more correct to say that a recession is caused by inadequate credit demand or failure of intermediation rather than an increase in money demand (to the extent that all monetary economists seem to use ’cause’ and ‘last link in a long chain’ almost interchangeably) ?”
I would say no. Replace my “antiques” with “bonds” or “IOUs”. Assume the price of bonds is fixed by law (like a usury law of some kind that prevents the bond market clearing). It’s exactly the same model, except we have changed the name of one of the goods.
Adding banks, and/or a central bank to the model will matter to the extent that they change the quantity of money supplied in response to changes in money demand, and in response to other things.
Nick – just to say how much I enjoyed this post, also the last one. This distinction between the different forms of non-consumption is crucial to understanding the impacts of population aging on economic growth – which was perhaps one of the things at the back of your mind when you wrote it?
Nick: “Assume the price of bonds is fixed by law”
Well – it is not. So Ritwik is absolutely right.
It is just confusing to talk about “money”. Money is just one financial asset among many. The FED do not care one bit about monetary aggregates except as a instrument to control what they do care about – interest rates.
The FED control inflation throug interest rates – not monetary aggregates.
The amount investors can borrow at some interest rate depend on resourse utilization and consumption – not monetary aggregates, which are flexible, and which the FED do not care about. Crowding out happens through changes in inerest rates which is determined by increased resourse utilization and/or consumption, not by a lot of people competing for some fixed credit stock. etc.
“Actually, I think it has more in common with some of your old posts, and our old discussions, than with MMT.”
Right, that’s what I was referring to. I’m the reason “saving” should be abolished.
On MMT, I also run into problems trying to grasp their attempts to explain themselves in NIPA terms — notably when S meets (or doesn’t meet) I.
But as I’ve pointed out, in his seminal “stock-flow-consistent accounting” paper Godley (not formally an MMTer, the term arose after his time, but…) has abolished “saving.” Doesn’t need it. I heartily approve.
I’ve had another think piece brewing, your post here may have given me the courage to post it.
“but if we think of income as a flow, then thinking of C and I as stocks is going to create problems.”
You start out with the C and I that you have produced in your stock of assets, hold this C and I until you find someone who’ll exchange for them with the M they have in their stock of assets. Now they are holding C and I and you are holding M. So here income isn’t a flow, it’s just a trade, an instantaneous swap of assets held in a portfolio.
How much of economics is taken up by definitional debates and confusion? You’d think there would be a universal set of definitions for economic terms somewhere so these issues don’t pop up. When I read William Hutt’s books I’m always pleased because he uses his first chapter to explicitly define every term he’ll be using.
Okay, not ready to post that think piece yet.
Nick:
“demand for a flow of antique furniture increases by an equal amount. What happens? This one’s a bit tricky.”
Tricky indeed. Asuming the stock of antiques is fixed, isn’t the “flow” of antique furniture utterly different from the flow of consumption or investment goods? There’s a fixed stock, circulating, not a linear production–>consumption flow. Maybe it’s not even right to call it a flow.
Does it make sense to talk about the antiques market in the same “flow” terms as the C market? (Or I, for that matter — investment goods get consumed too, of course, just more slowly; it’s all consumption spending in the long run.)
Do “supply” and “demand” have the same meanings (or interacting dynamics) in a market with no production–>consumption flow, in aggregate, no “supply” and no consumption either individual or aggregate? I really question whether they do, though I’m hard-pressed to support that statement rigorously.
JP Koning: “How much of economics is taken up by definitional debates and confusion? You’d think there would be a universal set of definitions for economic terms somewhere so these issues don’t pop up. ”
Thank you very goddamn much. I’d like to see fifty economists each write a definition of “supply” and throw them all into a hat. Pull them out one at a time and read them. I think they’d vary wildly and embarrassingly. And that’s before we get to layfolks, talking about “investment” and such…
Vimothy:
“When I think of saving, I think of an individual not spending his income, or equivalently a country adding to its stock of (human/nonhuman/tangible/intangible) capital.”
Zactly right. My confusion: What’s the relationship between the first and the second?
Supply and demand, stocks and flows.
Let’s think in stock terms first. Put the stock of antiques on the horizontal axis, and the price of antiques on the vertical. Draw a vertical supply curve to represent the fixed existing stock, which is all owned by somebody. Draw a downward-sloping demand curve, to represent the desired stock of antiques as a function of the price. The lower the price, the greater the stock of antiques I would like to own.
If everybody is identical, there will never be any actual trade in antiques. At the equilibrium price P*, the desired stock will equal the desired stock, both for each individual and in aggregate. At a price above P*, the desired stock will be less than the actual stock held, and everyone will want to sell some.
Now randomly take some antiques away from some people and give them to others. At P*, some individuals will have excess stock demand, and others will have excess stocks supply. Now we get trade.
Will those trades all take place in an instant, with some buying and some selling a stock of antiques? Or will those trades happen slowly over time, as people buy or sell a flow of antiques, and slowly get back to their long run desired stocks? That depends. If antiques are a small part of your wealth, and the market is frictionless with all antiques identical and so zero search costs (obviously not, for antiques). Each person would instantly buy or sell a stock of antiques to get back to his personal desired stock. Otherwise, there will be a flow of trades. If antiques are a large fraction of your wealth, you may only buy and sell slowly, in a flow.
Now think in flow terms. The price is on the vertical axis as before. But the horizontal axis is now the flow of net acquisitions of antiques, so you need to extend the horizontal axis in both positive and negative directions. Draw a vertical net flow supply curve at zero (they aren’t making any more). Draw a downward-sloping net flow demand curve which cuts the supply curve at P*.
If P=P*, there’s no trade (assuming everyone is identical). At P below P*, everyone wants to be buying a flow of antiques, (2 chairs per month). At P above P*, everyone wants to be selling a flow of antiques. If people are not identical, and some have a growing stock demand for antiques, and others a falling stock demand for antiques, there will be trade even if the net flow demand is zero and the price is at P*.
Steve: “My confusion: What’s the relationship between the first and the second?”
For the individual, there is no relation.
For all individuals together (assuming nor foreigners and no government) they are the same thing. If one individual saves by buying antiques, another individual must be dissaving by selling antiques. The only way they can all save is if more saveable assets get produced (investment).
The above uses the standard definition of “saving”: ie not spending on consumption. If instead we define saving as “not spending”, there is no relation between the first and second, either at the individual or the aggregate level.
Net flows and gross flows, demand and supply:
If everyone is identical, there will be no trade in antiques. Both net and gross flows of trade will be zero. If people are different, there will be gross trades but no net acquisitions.
If everyone is identical, will they trade in C+I? No. If everyone produces exactly the same good, and all have exactly the same preferences and technology, there are no gains from trade, so everybody is self-sufficient. You just produce your own C+I. That’s why I stuck in that assumption about it being tabu to grow your own C+I. In the real world, of course, there are lots of different varieties of C+I, and so we specialise and trade.
“extend the horizontal axis in both positive and negative directions”
Aha.
Steve: Yep. The other way to do it is to separate the buyers and sellers into two groups. If everyone is identical, the supply and demand curves meet at zero, on the vertical axis. So the supply and demand curves don’t look like an X. They look like a V, on it’s side, with the point of the V on the vertical axis.
Nick: “The only way they can all save is if more saveable assets get produced (investment).”
Right. I understand that’s how the NIPAs present things. The stock of “national savings” consists of unconsumed long-term real assets — drill presses, houses, and such that can be consumed through use (and time/natural decay) in the future. That makes sense in one sense. As Kuznets said, that is the true wealth of the nation.
But here’s where I get lost: how does buying/creating drill presses increase the quantity of “loanable funds”?
Wiki on loanable funds: “Savers supply the loanable funds; for instance, buying bonds will transfer their money to the institution issuing the bond…”
1. Are “savers” here investors in fixed assets, or non-spenders? (They can’t be both, because investing is spending.)
2. No: buying a bond truly is a barter transaction — a bond goes one way, and a checking-account deposit goes the other (with all the mechanics of bank-reserve intermediation/offsets). No increase in “loanable funds.”
??
In the NIPA conceptual construct, national “savings” are stored in fixed assets. How does that increased stock of “savings”/assets come to be embodied in an increased stock of net financial assets — which if MMT has it right (which I think they do), can only be increased via government deficit spending (or a trade surplus)?
“Will those trades all take place in an instant, with some buying and some selling a stock of antiques? Or will those trades happen slowly over time, as people buy or sell a flow of antiques, and slowly get back to their long run desired stocks? That depends. If antiques are a small part of your wealth, and the market is frictionless with all antiques identical and so zero search costs (obviously not, for antiques). Each person would instantly buy or sell a stock of antiques to get back to his personal desired stock. Otherwise, there will be a flow of trades. If antiques are a large fraction of your wealth, you may only buy and sell slowly, in a flow.”
Ok, thinking in a world with stocks, (an infinite series of balance sheets), trades still happen in an instant, even if you introduce search costs. You hold the antique on your balance sheet until you don’t. The antique is in your hand up until the moment it enters the hand of the buyer.
Introducing frictions means that someone can have the intention of selling that antique and will need to incur costs to search out someone to trade. But it doesn’t mean the process must be a conceptualized as a flow. Rather, the intention of selling an antique just moves the antique to a different part of an individual’s balance sheet. It continues to lie in the asset column of their balance sheet, but is moved from long-term assets to current or liquid assets. Introducing search costs means that instead of an interval of two balance sheets before a swap occurring, the interval is some number larger than two.
Steve: lovely questions. Let me try. I may come back to this later.
First, notice that in my model there is both saving and investment, but there is nothing whatsoever that looks at all like “loanable funds”! Money (in my simple model) is never lent. And antiques aren’t investment, because there’s a fixed stock. The people buy the investment goods directly. If we wanted to we could say that people lend themselves the funds to buy investment goods. But why would we want to do that?
How would we change my model so that it would make sense to talk about “loanable funds”? Maybe introduce “firms” and assume that all investment is purchased by firms, and assume that firms never retain earnings, but have to borrow from people to finance their investment. Which means we have a fourth good, called “bonds” (or “shares” if there’s uncertainty) that are IOUs from firms to households. If we make the additional assumption that firms never hold stocks of money, then we can say that the flow of new IOUs sold by firms to people will equal the quantity of investment. The market for those IOUs is the market for loanable funds.
The truth is somewhere in between that model and my original one, and far more complicated than either. Firms hold money, there are consumption loans too, etc.
I is necessary heterogenous in any world relevant to our own.
I can be expanded or contracted by choosing between alternative production processes which transform consumption and output patterns in the future, but NOT IN THE PRESENT. In other words, I can be larger or smaller in value terms depending on what sacrifices we want to make in the near term in order to reap greater value in the longer period.
I is NOT fixed, its value depends on our choices and the uses of make of things.
S is a FIXED measure, a fixed stock, measure IN THE PAST.
Therefore, S does NOT equal I. And S does NOT determine I.
QED
I posted this a while ago but it got gobbled. Here is my best attempt to remember it.
“Will those trades all take place in an instant, with some buying and some selling a stock of antiques? Or will those trades happen slowly over time, as people buy or sell a flow of antiques, and slowly get back to their long run desired stocks? That depends. If antiques are a small part of your wealth, and the market is frictionless with all antiques identical and so zero search costs (obviously not, for antiques). Each person would instantly buy or sell a stock of antiques to get back to his personal desired stock. Otherwise, there will be a flow of trades. If antiques are a large fraction of your wealth, you may only buy and sell slowly, in a flow.”
In a stock world (a world of infinite balance sheets), introducing search costs needn’t mean that trades occur as a flow. Search costs or not, an antique is held on your balance sheet until it isn’t. It’s in your hand until the moment when it enters the hand of the person you are trading with.
Search costs mean that people can have the intention of selling something but still hold it on their balance sheet. Instead of thinking of this as a flow, it can be conceptualized as a shift along a balance sheet. The asset gets transferred from the long term assets section of the assets column of an individual’s balance sheet to the liquid or current assets section of their assets column. Instead of a desired swap occurring after an interval of two balance sheets, it takes more than two balance sheets before consummation. But in the end it is still an instantaneous swap of stocks.
Greg Ransom: My intuition tells me that what you’re saying would help me understand. But I don’t understand it (or only dimly) as you present it. Are there readings that have provided Ahas for you in developing this thinking, which might be useful to me in understanding it?
JP Koning: I think what Nick’s saying is that in aggregate, if there are search frictions all the transactions will look like a flow, even though every transaction is necessarily instantaneous.
Greg: “S is a FIXED measure, a fixed stock, measure IN THE PAST.”
If that’s what you mean by “S”, you are using it to mean something different from other macroeconomists, for whom S is a flow. That’s OK.
Read Bohm-Bawerk, Capital and Interest:
http://www.econlib.org/library/BohmBawerk/bbCI.html
Or Hayek, Prices and Production:
http://mises.org/resources/681
Or Hayek, The Pure Theory of Capital:
http://mises.org/resources/3032
or Ingo Pellengahr, The Austrian Subjective Theory of Interest:
http://books.google.com/books/about/The_Austrian_Subjectivist_Theory_of_Inte.html?id=QgDoPgAACAAJ
Greg Ransom: My intuition tells me that what you’re saying would help me understand. But I don’t understand it (or only dimly) as you present it. Are there readings that have provided Ahas for you in developing this thinking, which might be useful to me in understanding it?
Well, the problem is, the “stock” / “flow” distinction as used in this context sort of begs the question at issue.
Can we at a moment in time call it a snap-shot of a flow? And what word do we want to use for that?
Greg: “S is a FIXED measure, a fixed stock, measure IN THE PAST.”
If that’s what you mean by “S”, you are using it to mean something different from other macroeconomists, for whom S is a flow. That’s OK.
Nick, the underlying, unspoken problem of central significance in all of this the mixing and muddling of real goods / barter economy marginalist thinking with money measured / aggregate Ricardo category / non-marginalist thinking, isn’t it?
If you talk about a flow of income, savings, consumption in terms of actual goods in a barter / pure marginalist construct, that is one thing.
If you talk of these things “measured” in dollars in a pretend circular flow model of the real world or in some Keynesian mish-mash, that is another.
Keynes and macroeconomics attempts to have its cake and eat it too, mixing and muddling the two
If I’ve expended money on some stuff, and measure that value in money expended, when I open my box of stuff, that stuff could turn out in the next instance to have no value in use for anyone, for any number of reasons. It could have rotted, etc.
The smoke and mirrors trick, the look over here not over there trick of “macroeconomics” is to project money measured valuations of real goods from the past or immediate present to the future.
And trick of using money measures combined with a machine that takes value from the past and extrudes it into the future is a trick that rules out marginalist and choice thinking when it comes to the alternative choice of alternative production goods across the future.
These don’t exit by the conceptual fiat of the money measure / value extrusion machine.
Nick, you’ve told me:
Capital is a stock.
Savings is a flow.
And Scott Sumner has told me:
Savings = production goods measured in money
So ….
Stocks = flows ??
Greg: “And Scott Sumner has told me:
Savings = production goods measured in money”
And what Scott meant (or should have meant) is:
Saving[no ‘s’] = [flow of newly-produced] production goods measured in money.
If Scott were a horse he would be a hunter; you can’t expect him to do dressage.
If Scott were a horse, could the horse-manure be any more plentiful? I’m bewildered by his latest. Is everything I’ve ever read about the balanced budget multiplier all wrong, or is he just playing word-games?
Steve Roth, Roger Garrison gives an intuitive, graphical expression to these ideas in his Hayek vs Keynes Powerpoint presentation found here:
http://www.auburn.edu/~garriro/macro.htm
Hey Nick I just came across this comment (by “Steve”!) on a Sumner post:
“it’s important to remind laypersons that the “economist’s S” = I. Most people in business or consumer economics think of saving as money in the bank or under the mattress, i.e., money hoarding. They also think that money hoarding is morally virtuous and should be rewarded with above zero interest rates. So it’s really important for you preface your discussions with the reminder that money hoarding isn’t S.”
Scott agreed.
Short version of your post here might be:
Don’t call it saving. Call it investment. Which is what it is.
And what results is not increased “national savings”, but a larger stock of fixed assets.
??
But still wondering about how individual saving/not spending creates loanable funds…
Steve: “But still wondering about how individual saving/not spending creates loanable funds…”
It’s easier if we stop thinking of saving, and instead think of a (flow) demand for non-monetary financial assets called “bonds”.
You can do 5 things with your income: buy C, buy I, buy A, buy bonds, hoard money. Then remember that you can buy negative amounts (i.e. sell) negative amounts of A and bonds, and dishoard money. If people are different there will be a flow trade in bonds. That’s the “market for loanable funds”. Trouble is, the only case in which the flow of bonds bought will equal total investment is if all investment is financed by selling bonds, and bonds are only used to finance investment (not consumption, antiques, or hoarding). Otherwise you have to rig the accounting to make it work. “You sold bonds to yourself”, and “we net out consumption loans in the demand for bonds”, etc.
Steve: but for lot of people, saving and investment mean the same thing and are also synonym with cash hoarding and bond-equity buying .
Regardless of the details, it’s clear that the word “saving” means very different things in everyday life and in economics. Hence, much confusion. An analogy: “work” in physics is not at all the same as “work” in everyday usage. This causes much confusion until the physics student learns that work(physics) is an integral, pure and simple. I’m gathering from this discussion that “savings”(economics) is* a fairly arbitrarily chosen name for the residue of income – expenditure(economics). I’m still not sure what expenditure(economics) is [is my new refrigerator expenditure or not? I think it is but as a capital good it doesn’t qualify to be “expended on”(economics)], but I’m sure that savings(economics) != savings(ordinary). This has bothered me in economics reading as much as “work” did in physics class, but in the long run physics has been much easier to understand.
* “Savings” is a plural word. It got singularized by billboard writers (?) about 1980. “Saving” is a process, which results in the object called “savings”. A slightly different usage: If you get a discount of $5, you saved $5, so you have a saving (singular) of $5. Now don’t you feel better?
Thomas: I tend to use saving singular for the flow, and savings plural for the accumulated stock. The refrigerator is a lovely example we get our students to discuss. If it’s seen as an investment rather than a consumer good (which strictly it is, because it lasts and yields a flow of services for many years) then buying a fridge is “saving”.