tag:blogger.com,1999:blog-2761684730989137546.post3160661558677349625..comments2024-03-28T04:13:36.779-04:00Comments on Mike Norman Economics: Ramanan — Income ≠ Expenditure? [Steve Keen]mike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger124125tag:blogger.com,1999:blog-2761684730989137546.post-41280141512723339342012-10-09T12:19:42.991-04:002012-10-09T12:19:42.991-04:00http://andrewlainton.wordpress.com/2012/10/09/rama...http://andrewlainton.wordpress.com/2012/10/09/ramanan-iyer-on-the-keen-change-in-ad-function-what-lies-between-identities/#comment-6865<br /><br />“Expenditure = Income before debt injection plus debt injection.”<br /><br />That expresses future period expenditure as a function of prior period income, which is fine as a functional expression.<br /><br />But he should make that time sequence clear in his equation notation. It is Steve who has confused ex post and ex ante in his existing equation.<br /><br />And that functional expression is certainly nothing like an accounting identity, for a host of reasons that have already been discussed.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-11913174097534697902012-10-09T12:18:17.826-04:002012-10-09T12:18:17.826-04:00Thanks.Promoted to a post.Thanks.Promoted to a post.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-66537944190127913382012-10-09T10:52:36.212-04:002012-10-09T10:52:36.212-04:00I comment in detail on my blog here
http://andrewl...I comment in detail on my blog here<br />http://andrewlainton.wordpress.com/2012/10/09/ramanan-iyer-on-the-keen-change-in-ad-function-what-lies-between-identities/Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-36679219569632230632012-10-09T08:13:59.392-04:002012-10-09T08:13:59.392-04:00OOPS
That last paragraph in my previous comment w...OOPS<br /><br />That last paragraph in my previous comment was copied from Toms comment as well and mistakenly pasted in my post. My comment ends at "4 years"Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-89595729568978271822012-10-09T08:11:47.647-04:002012-10-09T08:11:47.647-04:00@Tom.."It's good to keep in mind that all...<br />@Tom.."It's good to keep in mind that all money denominated in a particular unit of account (currency) that is in use by non-govt is either bank money netting to zero or NFA injected by govt. There are also derivatives built on that infrastructure and money-like credit."<br /><br />Yes, that much is clear to me. I additionally think about it like this; My salary is not a loan to me but it may have ultimately come from a loan to my employer (our group apparently has borrowed to make payroll recently), so while Im not a borrower of my salary someone else is(sometimes). This cannot go on forever. We cannot in aggregate keep simply borrowing from banks to continue to make payments..... its just pure ponzi then. I think this is what separates Bank money from Treasury money(NFA). At some point our "non borrowed" income must be sufficient to pay down our debts or we will be insolvent. In aggregate, bank money cannot be the ultimate source of our income, it must come from somewhere else. We cant simply borrow ourselves to prosperity.<br /><br />Relating this to how I see some of Keens point. My buying power or aggregate demand is my income plus whatever I might borrow. Whatever I borrow is not income but a one time burst of spending which can certainly lead to economic activity (car or home manufacturing) and increase employment (related to car and home manufacturing, sales, repairs etc) or it can simply be an increase in my deposit level with an offsetting loan (net to zero) Until I take my deposit and do something with it its not adding to demand whether that be a car, house or even a stock purchase. My loan then becomes someone elses income then just like my bosses loan can become MY income. Once that deposit changes names from mine to Akin Fords, it is now Akin Fords income and I need to use my income to pay down my debt to the bank. Now my aggregate demand potential is my income minus the % of income I use to pay down my debt. Akin needs lots of us using our debt to create their income stream. Once that slows down too much we have what we have seen the last 4 years.<br /><br />This is a complex web that is masked by both economic modeling and an overly simplistic approach to accounting. This degree of complexity is not going to be easy to model without a lot of "moving parts." No black boxes either"Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-21429305452258860802012-10-09T07:01:25.886-04:002012-10-09T07:01:25.886-04:00Tschaff,
Can you explain, before what fact?
Is ...Tschaff,<br /><br />Can you explain, before <i>what</i> fact? <br /><br />Is income meant to be the same ex ante and ex post, bigger ex post than ex ante or bigger ex ante than ex post?<br /><br />Let's say that income is $1000 and dD/dt is $100 per year. What is "ex ante" aggregate demand here (i.e., what is $1000 plus $100 per year)?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-14014167857770182052012-10-08T19:58:11.494-04:002012-10-08T19:58:11.494-04:00From Keen:
"Yes & they're confusing e...From Keen:<br />"Yes & they're confusing ex-ante & ex-post. Simplest def'n: Expenditure=Income before debt injection plus debt injection."sparc5https://www.blogger.com/profile/00063684490437512822noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-30240289443991288302012-10-08T17:10:41.678-04:002012-10-08T17:10:41.678-04:00Fixed. Thanks.Fixed. Thanks.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-86570455837249389192012-10-08T17:07:07.386-04:002012-10-08T17:07:07.386-04:00Think you're in the wrong thread, Tom!Think you're in the wrong thread, Tom!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-59641504533957055822012-10-08T16:08:00.324-04:002012-10-08T16:08:00.324-04:00In the ADAS model, think of equilibrium is a metho...In the ADAS model, think of equilibrium is a methodological convenience that enables us to isolate the effect of a shock. In the event of a shock, not everyone's plans will be satisfied at current prices and there will have to be some kind of adjustment process--the adjustment process being exactly what we're interested in.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-3899729252830478322012-10-08T15:15:58.290-04:002012-10-08T15:15:58.290-04:00@Ramanan: You mentioned Hicks' book earlier an...@Ramanan: You mentioned Hicks' book earlier and I sprinted to look at it on Google Books and Amazon. Seems great from what I'm allowed to see. Unfortunately it's like $115!<br /><br />See also Clower on "Stock Supply" vs. "Flow Supply." You see economists using those terms occasionally (including Nick Rowe), vaguely and sloppily, but aside from that one early, tentative Clower article I don't think this subject has been theorized at all. It's where my thinking has naturally led me, thinking about supply and demand in equity markets (almost all stock supply) vs services (all flow) vs commodities (mixed). <br /><br />Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-44442257281147783642012-10-08T15:05:15.427-04:002012-10-08T15:05:15.427-04:00Ram,
I have weird thoughts about markets - as in ...Ram,<br /><br />I have weird thoughts about markets - as in the idea that stock markets are always wrong and that volatility is the evidence of this.<br /><br />In the same way, it seems to me that debates about the existence of equilibrium or not are a matter of time positioning - I could say that stock markets are always right in the current price and always in current equilibrium merely because trade takes place, or that they are always wrong and always in current disequilibrium merely because the price will always change.<br /><br />Cat chasing its tail, so to speak.<br /><br />Similarly with supply equal to demand or not.<br /><br />Leads me to believe that all is BS outside of stock flow consistent accounting.<br /><br />And I think that if somebody gives me an example of a transaction in a pure barter economy, I can translate it to stock flow consistent accounting. So this is no mere superficiality in my view.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-70927595525929266412012-10-08T14:54:37.817-04:002012-10-08T14:54:37.817-04:00Steve,
"My intuition says that there are fun...Steve,<br /><br />"My intuition says that there are fundamental, low- (high-)level conceptual disconnects going on in this current discussion, having to do with how we think about (thinking about) ex-post and ex-ante. "Planned" and "effective" (potential?) demand, "expected" saving, etc. I think Nick Rowe thinks he completely understands these relationships (and Keen is obviously trying to, maybe thinks he does)"<br /><br />Yes. Right on. That's what I mean by time-consistency (or inconsistency) issues, as opposed to "spatial" issues that were more the focus of our previous sector type discussions<br /><br />Also, very interesting that you mention Nick. I thought of him as well in his various posts about the meaning of supply and demand curves and how they are often misinterpreted, etc.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-57482996093003345702012-10-08T14:54:17.175-04:002012-10-08T14:54:17.175-04:00Ramanan,
It’s been a while since I read Mankiw, b...Ramanan,<br /><br />It’s been a while since I read Mankiw, but if I remember correctly he models prices as sticky in the short run, flexible in the long run, with a vertical long run aggregate supply curve. If you think about it, the ADAS model is meant to explain the aggregate fluctuations that typify the business cycle. If you have continuous and instantaneous market clearing then the model is not going to generate those fluctuations in response to demand shocks.<br /><br />It seems to me that you are confusing the ADAS model with competitive general equilibrium proper. CGE is certainly a neoclassical model, but it’s not to be mistaken for ISLM and ADAS!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-56019696211433969592012-10-08T14:50:57.703-04:002012-10-08T14:50:57.703-04:00JKH,
I have this book "A Market Theory Of Mo...JKH,<br /><br />I have this book "A Market Theory Of Money" by John Hicks written in 1989 (who would have been embarrassed all his life for his IS/LM) whose first chapter is "Supply And Demand?"<br /><br />In that he points to the fact that just everyone outside the heterodox community believe in Walras and Marshall. Their writing was as if there is no inventory! <br /><br />I see a lot of Walras's name in many blogs!<br /><br />Also, I don't know much mainstream economics, but it is possible they have taken this into account but usually these tweaks are built around the same old notions. <br /><br />(An example of this is the crowding out theory which doesn't seem to work, so neoclassicals say central bank monetizes the debt - as if the amount of cash held by the public is purely determined by the central banks' action and doesn't depend on households' needs). <br /><br />Hicks ends the chapter saying that the difference between supply and demand is the change in stocks (inventories). <br /><br />However no price clearing is assumed. The role of prices is different altogether. <br /><br />It is still possible to have stock flow consistency with a demand and supply description. But it is entirely different from the standard mainstream text and little to do with "supply demand diagrams"<br /><br />Whatever the firms produce is the supply and whatever the purchaser of final sales demands is the demand. <br /><br />[But since firms decide on production on how much they expect to sell (not necessarily equal to it), it is said economies are demand-led.] <br /><br />One example: It is possible that my propensity to consume is dependent on the interest rates. Higher the rate, lower I consume. So if interest rates are hiked, I demand goods and services less. so firms as a whole will be left with more inventories. Hence they will supply less in the next production period. <br /><br />So the demand-supply thinking can be very well be consistent with stock-flow consistency. <br />Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-19543959052941840512012-10-08T14:33:21.866-04:002012-10-08T14:33:21.866-04:00It seems like the proper place for private debt wr...It seems like the proper place for private debt wrt sectoral balances would be something like this:<br /><br />Net Government balance + (Net domestic Private balance + Net domestic private debt) + Net foreign balance = 0. <br /><br />With that, I can see private debt accommodating net private savings (the residual) in the same fashion that net gov and net foreign do without any accounting violations or making up my own definitions. Unless I'm missing something. Which I probably am.geerussellhttps://www.blogger.com/profile/10631984593634015839noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-47915110550956862832012-10-08T14:13:15.808-04:002012-10-08T14:13:15.808-04:00JKH, right as always. It's really about the wo...JKH, right as always. It's really about the words we use to describe the accounting.<br /><br />In my example Gross Investment Spending = Saving<br /><br />So Spending = Saving!<br /><br />I don't know how anybody could be confused by that.<br /><br />My intuition says that there are fundamental, low- (high-)level conceptual disconnects going on in this current discussion, having to do with how we think about (thinking about) ex-post and ex-ante. "Planned" and "effective" (potential?) demand, "expected" saving, etc. I think Nick Rowe thinks he completely understands these relationships (and Keen is obviously trying to, maybe thinks he does), but my intuition tells me that one or the other or both doesn't/don't. Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-92070453085001611532012-10-08T14:00:56.458-04:002012-10-08T14:00:56.458-04:00Steve,
The issue back then was sector-consistent ...Steve,<br /><br />The issue back then was sector-consistent definitions of saving, which must include the potential for sector dissaving, which can't be covered by saving = gross investment. It has to be a residual definition, because of the sector imbalance problem.<br /><br />Here, we've been discussing expenditure = income in the context of a closed system. The problem here is what I think is a time inconsistency in Keen's equation.<br /><br />Your saving = investment also works for a closed system at the macro level. But the discussion back then had to do with sub-sectors such as the household sector, etc. That's my recall anyway.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-55153646339803067722012-10-08T13:37:59.117-04:002012-10-08T13:37:59.117-04:00We've meandered through these thickets before....We've meandered through these thickets before...<br /><br />@Ramanan: "ends up in claims where he has income both equal to expenditure and not equal to it"<br /><br />He's not alone in promulgating confusion.<br /><br />Saving = Income - Expenditure<br /><br />But Income = Expenditure! So Saving = 0.<br /><br />I know, I know, "Saving" = Income - "Consumption Expenditure"<br /><br />So we'll just call Gross Investment in Fixed Assets "Saving."<br /><br />That makes everything so much more understandable, don't you think? Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-36684284515861020142012-10-08T13:30:05.981-04:002012-10-08T13:30:05.981-04:00E.g. Ram:
Define "market clearing" of s...E.g. Ram:<br /><br />Define "market clearing" of supply and demand in financial markets e.g. GM stock - when there is always a limit order for stock above the last trade price. If you treat that sell order as a "business", it means that there is always "inventory", and the market never clears. On the other hand, the market always clears what's offered against what's bid at the prevailing price. So what does clearing mean and what does supply and demand mean in that context?<br /><br />(Yes I know its an asset market example; not an expenditure/income market example - the counterpart to the GM car dealer market maybe.)JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-32696585559327730732012-10-08T13:21:50.402-04:002012-10-08T13:21:50.402-04:00Yes, Ram. It's tangential.
My original questi...Yes, Ram. It's tangential.<br /><br />My original question was:<br /><br />"You seem to be suggesting that there is some sort of economics where inventories are "not allowed".Is there really such a thing?"<br /><br />You replied yes, but I think you may mean that supply and demand imbalances are relative to planned or expected inventories. As I said, it seems ridiculous to imagine that economics anywhere would presume that inventories don't exist.<br /><br />But beyond that - a separate point. My natural foundation for thinking about economics (to the degree I think about it all :)) is stock/flow accounting consistency. This has little to do with Godley et al, and much more to do with personal experience.<br /><br />The result is that I spend little precious time on supply and demand functions.<br /><br />So I wonder how you even get supply/demand thinking consistent with stock/flow based economic thinking?JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-24860754734335636662012-10-08T13:11:44.598-04:002012-10-08T13:11:44.598-04:00From the second para above not talking of neoclass...From the second para above not talking of neoclassical economicsRamananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-29953638211438206822012-10-08T13:07:36.341-04:002012-10-08T13:07:36.341-04:00JKH,
My point was that non-heterodox economics ha...JKH,<br /><br />My point was that non-heterodox economics had been describing as if there is a market place where everyone meets and products are cleared as if it is a fish market. So the description is as if there is no inventory at all. <br /><br />The notion of supply makes sense however. A manufacturer may expect demand to go up and will produce more expecting higher sales, so there is higher supply than otherwise. It may turn out to be wrong, so there is more inventories left. The producer will then produce less in the next period. <br /><br />The demand side makes sense because for example households may increase their propensity to save and hence purchase less. They may not even change their propensity to save but consumption demand may be less because households' income dropped. <br /><br />Or it that tangential to your point?Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-276730256474591082012-10-08T12:30:04.652-04:002012-10-08T12:30:04.652-04:00Ram,
Thanks. Didn't quite get to my question ...Ram,<br /><br />Thanks. Didn't quite get to my question though. No car dealer targets zero inventory at the end of an business accounting period, unless he intends on going out of business. That would simply be suboptimal inventory management. Given that, its only logical that macro level inventories increase as the economy grows - ex technology improvements in inventory management. Given that, I struggle to see the meaningfulness of supply demand functions in a world that must be stock flow consistent from an accounting and business perspective. If you premise some notion of "market clearing" of "supply and demand" on the objective of zero inventories, markets will never "clear" by the dealer's objective. That seem silly for the real world.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-50023192923432983552012-10-08T12:01:05.103-04:002012-10-08T12:01:05.103-04:00Greg To me an important issue is the stability of ...Greg <i>To me an important issue is the stability of a system being mostly driven by bank credit money and how to achieve it.</i><br /><br />It's good to keep in mind that all money denominated in a particular unit of account (currency) that is in use by non-govt is either bank money netting to zero or NFA injected by govt. There are also derivatives built on that infrastructure and money-like credit.<br /><br />This is a complex web that is masked by both economic modeling and an overly simplistic approach to accounting. This degree of complexity is not going to be easy to model without a lot of "moving parts." No black boxes either.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.com