Revenge of the Savings Glut Theory? | 53 comments (53 topical, editorial, 0 hidden)

Re: Revenge of the Savings Glut Theory? (none / 1)

the reason that China is not "responsible for the imbalance because it saves too much", is that "saving too much" cannot cause an imbalance. If there is such a thing as "saving too much" causing anything. It is a symptom, not a cause.

The issue here is the causal interpretation of the accounting identity savings = investment.

I suspect that supply-side economics is consistent with the view that savings causes investment. This is inconsistent with Keynes' paradox of thrift. Therefore in a Keynesian view saving doesn't cause investment. It is either that investment causes saving or that there's a third common cause of both.

Causal relationships are extremely difficult to infer from data. You run into correlation is not causation, as well as the problem of what direction causation runs in (post hoc ergo propter hoc being a possible problem here). And since economics is not experimental but historical, one would have to do a thorough historical study and then ensure that no external factors have been overlooked that can introduce a spurious apparent direction of causation.

Is economics ultimately a collection of just-so stories? Do we like the paradox of thrift because it is consistent with solidarity politics?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Wed Jun 9th, 2010 at 04:43:00 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

In a way I have to admit that the "Paradox of Thrift" is a "just so story," because much of Keynes work is a set of stories, rather than a full model.

However, I like the Paradox of Thrift because it appears to match the reality of what happened in the Great Depression and indeed in previous episodes of deflation...

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jun 9th, 2010 at 05:39:39 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (4.00 / 3)

Is economics ultimately a collection of just-so stories? Do we like the paradox of thrift because it is consistent with solidarity politics?

I think economics, done properly (rare, I know), lends itself more to our way of thinking than is commonly thought because of what passes for economics on television.

What it should be is a combination of sociology, political science, logic, and statistics. What it winds up being in too many cases is mathematics' retarded brother.

Simon Johnson's blog had a post up on this the other day that made a point I've -- clumsily -- tried to make in the past, noting differences in opinion between PhD economists and undergraduates (the former being quite a bit more liberal than the latter): Studying economics as an undergraduate tends to correlate with becoming a Republican, but going on to a PhD tends to swing the person back to the left.

A little bit of economics can be a dangerous thing.

You have to get fairly deep into the subject, or you wind up believing crazy shit because your Macro 101 textbook had a pretty graph and your professor was more interested in writing papers than teaching properly. You get people believing that RATEX is actually true rather than simply a tool for isolating other variables, which leads to all kinds of other absurdities.

Part of it is a time problem, I think. It's difficult to fit the basic concepts of the different areas into a semester, let alone really dig into information asymmetries, price and wage adjustment, etc. At best they'll tend to be covered to some extent in the intermediate-level classes. And I'd guess most students aren't really interested in diving that deep into the field. They just want the degree.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 06:56:51 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (4.00 / 3)

Drew J Jones:

A little bit of economics can be a dangerous thing.
You have to get fairly deep into the subject, or you wind up believing crazy shit because your Macro 101 textbook had a pretty graph and your professor was more interested in writing papers than teaching properly. You get people believing that RATEX is actually true rather than simply a tool for isolating other variables, which leads to all kinds of other absurdities.

Maybe it's time to rewrite first-year economics textbooks.

If you only take a first-year physics course you may end up believing in a clockwork universe, but at least planets and billiard balls and boxes on slopes will behave as advertised in your textbook... And any misconceptions you may take away don't have toxic sociopolitical consequences.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Wed Jun 9th, 2010 at 08:32:24 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I suspect the textbook market is too fractured and polluted by competing views on teaching and political agendas for that to do much good. Everybody writes textbooks these days, because that's where the money is, and obviously professors are going to want their students to buy their textbooks.

I'm sure it's always been that way to some extent, but it used to be that Samuelson's textbook was quite common.

Although Krugman's intro texts are gaining some steam, as I understand it.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 08:40:42 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (4.00 / 2)

If you want to change economics you do what the neo-libs did - find promising students, pay their way through college, give them privileged access to movers and shakers, and guide them until they're installed as the next generation of professors.

This is rather more expensive than producing a textbook, but it would be very much more effective.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jun 9th, 2010 at 08:51:26 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

I am under the impression that the portions of the macro economics that are thought to future MBAs are there to install the ideologically correct view of the world. "Greed is good, thus the company I work for does right in being greedy."

Bureaucrats work better if the believe in their organizations cause, and multi-nationals are no exception.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Jun 10th, 2010 at 07:57:21 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

Here the post at Baseline Scenario. Judging by the comments, other people's experiences seem to be much the same.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 07:14:43 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

"accounting identity savings = investment"

That's not a GAAP. GAAP records spending. Spending amounts (values) are classified either asset or liability.

Balance sheet asset category, "investment activity," refers to both cash equivalent value of securities held for sale (of which guidance boards permit a variety of valuation methodologies including purchase price applicable to this asset type) and income, if any, from interest- and dividend-earning securities.

"savings = investment" is a finance supposition; it's not even a mathematical identity.

Diversity is the key to economic and political evolution.

by Cat on Wed Jun 9th, 2010 at 04:29:28 PM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I hope you're not being deliberately obtuse here

Savings identity or the savings investment identity is a concept in National Income Accounting stating that the amount saved (S) in an economy will be amount invested (I). More specifically, in an open economy (an economy with foreign trade and capital flows), governmental borrowing plus private investment must equal private savings plus foreign investment. In other words, investment must be financed by some combination of private domestic savings, government savings (surplus), and foreign savings (foreign capital inflows).
Note that this is an "identity", meaning it is true by definition. This identity only holds true because investment here is defined as including inventories. Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Wed Jun 9th, 2010 at 04:43:17 PM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I'm not being obtuse at all.

savings investment identity is a concept in National Income Accounting

"National income accounting" is what it is, a model to estimate GNP/GDP.

Diversity is the key to economic and political evolution.

by Cat on Wed Jun 9th, 2010 at 07:14:32 PM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

It is, indeed, "accounting", though not in the sense of "accounting" as in "GAAP".

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:23:31 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I think you're a bit confused here.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 06:28:23 PM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I meant to demonstrate a distinction between the meaning of "savings" according to generally accepted accounting principles (GAAP) and the meaning of "savings" according to whatever economic or finance nomenclature being repeated here.

"savings = investment" is not an "accounting identity" because, according to GAAP, savings is money (or cash equivalent) not spent or otherwise disposed --even for a productive purpose such as "investment." Savings is an amount of retained income. The only "savings" recorded in a financial statement, according to GAAP, is the market value of cash. Currency is an asset type recorded on a balance sheet; the value fluctuates from reporting period to reporting period.

Value terminology employed for national income accounting purposes remotely resemble those standardized by GAAP. That annoys me.

I apologize for commenting on the subject. Again.

Diversity is the key to economic and political evolution.

by Cat on Wed Jun 9th, 2010 at 08:27:55 PM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

Cat:

Value terminology employed for national income accounting purposes remotely resemble those standardized by GAAP. That annoys me.

If you could develop in a diary or comment what you think National Income Accounting should be like that would be interesting.

Otherwise, this is like a physicist, a chemist, and a perpetual motion machine crank getting annoyed at each other for using different meanings of the words "free energy"

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:26:00 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

Being a little bit more constructive, one can picture the economy as a network with a balance sheet at each node and cash flows on the links. The net of the cash flows at each node gives you the income statement for that node, and the sum total of all the unsigned cash flows on the links give you "national" income.

What's wrong with that picture or how do actual accounting and actual national accounting differ from it?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:55:23 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

Is money conserved over the network?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 06:51:46 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

Each node can be a source or sink.

by generic on Thu Jun 10th, 2010 at 07:28:01 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

But the cash flow on a link contributes a positive amount to the money balance of the destination node and a negative amount to the origin node, so the total doesn't change.

Money nonconservation comes from credit in the form of intertemporal links.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:00:48 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I was thinking in terms of credit, but even without taking credit into account, what prevents a node from saving? Or more accurately: hoarding?

by generic on Thu Jun 10th, 2010 at 09:20:42 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (4.00 / 2)

Given that the total balance is zero, either the time-average of the money flow into each node is zero, or some nodes will have a net average loss of money. This is unsustainable and eventually these nodes will go bankrupt. Since nodes abhor negative money balances, these balances will be compensated by issuing IOUs instead of paying outright. This means that the total money mass grows in proportion to the unsigned sum of the nodes' net money flows. This is inflation.

The more volatile transaction prices and volumes are, the larger will this unsigned sum of net money flows be, and the more credit will be created to prevent parts of the network from dying (going bankrupt). This means that inflation is correlated with market volatility.

So, the freer the market the larger the inflation of the money mass. Price and volume control, be it through market power or regulation, reduces volatility and the pressure to create credit and inflation.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:35:37 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

In the absence of credit, yes.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 08:56:42 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

That could be a problem. :)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 08:57:32 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

Why? Money is not conserved in the real economy either.

Let's see, if there is a cash flow on an edge, the amount is subtracted from the balance of the starting node, and added to the balance of the end node. The total of the balances doesn't change.

Instead of exchanging cash along an edge, an IOU at a discount may be exchanged. Say A has to pay B 100 but instead pays B with an IOU for 105 payable a year later, with "the market" agreeing that that IOU has a present value of 100. The balance sheets of A and B still change in ±100 now, so the total balance is still conserved.

But the total side of the whole network's asset (or liability) side has increased because this IOU didn't use to exist.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:12:50 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

The balance sheets of A and B still change in ±100 now

Gah, ±100.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:37:23 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

Yes, certainly. In a model in which real factors abstracting from financial considerations determine a level of full employment output to which the economy inevitably gravitates, the act of not consuming out of income frees up resources for other uses.

Its just that that gravitation toward full employment is not based on any empirical cause and effect explanation, its based on the way the model needs to be built to use the traditional analytical toolkit.

So, yes, non-empirical mainstream economics certainly is just a series of Just So stories. If we want empirical economics, we have to abandon the idea of making the re-use of a particular analytical toolkit the defining feature of mainstream economics, and replace it with an effort to provide cause and effect explanations about the material provisioning of society.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jun 9th, 2010 at 11:11:13 PM EST
[ Parent ]

Revenge of the Savings Glut Theory? | 53 comments (53 topical, 0 editorial, 0 hidden)

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