The MMR conversation on savings and investment has now raged to over 600 comments. It would be an understatement to say that the conversation has been illuminating. To me, one of the more interesting facets of this discussion is the fact that we have MMTers, horizontalists (like Ramanan), MMRists and previously undecideds (like the mysterious JKH) all agreeing! I think this speaks volumes about the merits of what MMR is building. Our flexible, fact based and apolitical approach is proving agreeable to many and I hope we’ll continue to embrace even those who might disagree with much of what we say.
But the most illuminating point that came from the discussions was the point on S = I + (S-I), where S = Savings, I = Investment. Now, for the layman, I will try to break this down as best I can so bear with me. What we learn from the sectoral balances approach is that the government’s deficit is the non-government’s surplus. If the government taxed all your assets at a rate of 100% then you’d have no dollar denominated assets. That’s simple enough. The sectoral balances is a powerful concept as it highlights the power of the government and helps explain why a sovereign currency issuer might run persistent budget deficits without running into a Greek problem (the USA for instance has pretty much always run deficits so the idea that deficits are inherently bad, is inherently wrong!). But when we break this equation down we have to be very precise about what it means because improper explanation will lead one to put the cart before the horse.
Read it at Pragmatic Capitalism
Capitalism Makes Socialism Acceptable
by Cullen Roche
(h/t Kevin Fathi via email)
For the life of me, I can't understand why they think this is an important revelation.
ReplyDeleteThe MMT contention still stands. In a closed economy, the private sector as a whole cannot net accumulate financial assets unless the government runs a deficit.
It is entirely consistent with this truth that one part of the private sector can net accumulate financial assets if another part of the private sector net accumulate financial liabilities.
Thanks, Dan. I thought it was just me. I have a JD, a master's in economics, and a heavy dose of philosophy and I'm still baffled.
ReplyDeleteI guess I'll just have to wait for their paper to wade through the accounting and check it for myself.
I guess I'll just have to wait for their paper to wade through the accounting and check it for myself.
ReplyDeleteThat's what I said from the get-go. Things often sound great until written up or numbers put to it.
But airing things on the blogs and getting feedback in comments is a good preparatory phase. I just don't have time right now to read through 600 comments, so I'll wait for the work up.
I'm with you Larry. Eventually we'll get something more definitive from them.
ReplyDeleteTom,
ReplyDeleteIt's up to 637 now. I gave up at around 500 or so. I juts saved the whole discussion to my desktop as a PDF, and it comes out to 212 pages!
Rather interesting that they state the following as a 'law':
ReplyDelete“We generate improving living standards through the efficient use of resources resulting in the optimization of time”
Is this a tool which is being used to frame arguments? What do they mean by 'resources'? 'Optimization of time', WTF? Did Einstein miss something?
IMO, clearly they ain't going to produce anything that will help the 'cause' anytime soon, except generate a lot of noise.
Looks to me like the MMR guys are post hoc justifying their preconceptions again.
ReplyDeleteThe reason that S = I + (S -I) is very simple.
We have banks that buffer and they can't match savings and investment requirements perfectly in every accounting period.
So there is always a mismatch which is what (S - I) represents.
Government then has a choice as to whether to accommodate that excess saving (with bonds or money creation) or confiscate it (via T)
And that's about it from a nominal point of view.
The bottom line is that it is better for the economy if 'S' and 'I' can move freely and relatively independently from each other rather than being constrained by some fixed quantity of money.
A good dose of 'lex parsimoniae' is required I feel.
Nice insight Neil.
ReplyDeleteAlso, I think they need to read up on what the accounting standards are and include...
"But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm."
I could be wrong, but in-kind transfers like this are still "income". While the monetary value of the income and savings might need to be imputed/estimated, its still counted. Therefore S=I still holds and both grew with the example given.
It's all 'rear view mirror' to me.. ex post...
ReplyDeleteThe big thing I'm taking out of this week is Bill Mitchell's concept of savings in a monetary economy as "a hedge against uncertainty" that is at least predictive/explanatory of the concept of 'savings' in a monetary economy in the first place...
This looks like it was covered in Luke 12 :"29 "And do not you be seeking what you may be eating and what you may be drinking, and be not in suspense.
30 For, for all these the nations of the world are seeking. Now your Father is aware that you need these."
"BE NOT IN SUSPENSE" this is what we may term today the "uncertainty" .
That said, Jesus pointed out here that this is simply what 'the nations' do, this is the way "we roll" so to speak, this is how those of us of 'the nations' (ie Greece & Rome) are put together.
Those of 'the nations' are always worried about something and are constantly seeking "a hedge" against what we perceive as uncertainty, possessing no expectation in God. "We've got it covered Lord!, no worries! Dont worry about it!, etc.."
Jesus was advising Israel not to get caught up in this activity which was prevalent in the nations then (and still now btw!). His advice obviously didn't work.
Resp,
Excess saving could be fixed by applying demurrage on currency. Today it is a practical solution since most money is digitalized.
ReplyDeleteThe only reason Keynes had against it was that people would use other 'forms' of money, since they did not involve being 'stamped' all the time. He was referring to the Wörgl experiment, which was based on a depreciating currency which required holders to pay a periodic fee, so that the local currency could be exchange for a more liquid currency form. Based on reading his "Treatise on money" or whatever its titled.
Anyway if there is one thing that MMT can learn from the Austrians it would be the usage of Demurrage.
I just discovered something very very deep:
ReplyDeleteA = B + (A-B)
it hold across time and space, I kid you not.
In their case, yes, selling each other stocks at ever increasing prices creates a lot of I=S. No need for deficits (I-S). This is not monetary savings, they save the stocks. And the wealth grows too, each time the stocks are revalued up, but this wealth is a stock not a flow, so this effect is not seen in flow equations like S=I + (I-S). For every MMT-er it is very trivial.
They are drifting towards NGDP targeting - increasing the wealth stock of the private sector by targeting the assets prices, no need for deficits. Again, every MMT-er would say it should work, but is hard in practice. The Fed in charge of inflating the stock market? Ugh.
Like the Austrians they "discovered" that you can save a coconut without a government deficit(!). And they insist MMT is unaware of this... (the appreciation and depreciation of real assets, like housing, was the base of MMT's predicting the financial crisis before they even heard of MMT).
MMR has a chance to bring a lot of people into the paradigm, but they should slow down a bit and not insist on discovering "flaws" in MMT as a start. So much wasted energy and they only lose credibility in my opinion.
Neil: "The reason that S = I + (S -I) is very simple.
ReplyDeleteWe have banks that buffer and they can't match savings and investment requirements perfectly in every accounting period."
Exactly. I modern economy is all about buffers — (after Joseph showed the Pharaoh how it is done, so the "modern" economy goes a long way back.
Savings acts as a buffer. It's an essential part of cash flow management, along with lines of credit, to make up for shortfalls in revenue expectations and provision for unexpected expenses, like equipment failure. Even most households have figured this out, too, although not on the level of a CFO of a large organization.
The military has buffers stocks of vital resources, especially fuel.
Everywhere one looks, one finds buffer stocks to supplement inadequate flows whenever necessary.
The ultimate responsiblity for maintinging buffer stocks lies with the government, as Joseph knew. The government is the buffer of last resort. This is the essence of the lender of last resort, for example, and it is the reason for maintaining the strategic petro reserve. Governments have also traditional provided buffers for agricultural products to smooth out volatility in case of supply excess and deficiency that would harm domestic agricultural producers, who might not be able to hold a buffer stock as the level required by circumstance.
Therefore, the notion of a buffer stock of employed is a no-brainer. It's "savings" of human resources that smooths out volatility in the labor market while also maintaining the quality of the resource.
What is so difficult to understand about buffering, when it is the basis of a modern economy and everyone does it wrt personal finances.
Rather interesting that they state the following as a 'law':
ReplyDelete“We generate improving living standards through the efficient use of resources resulting in the optimization of time”
Is this a scientific law that states an empirical relationship observed to hold universally and usually expressed as a mathematical equation, or is it an apriori principle, i.e., an assumption?
A scientific law states a relationship that is empirically observed to hold universally, in contrast to an apriori theoretical assumption of a deductive system. Is this an empirical scientific law or an apriori theoretical assumption?
It looks to me like the attempt to state the economic law of productivity which states that living standard increases with rising productivity, where productivity is defined as "the measure of a total output per one unit of a total input." According to Wikipedia on productivity, "At the national level, productivity growth raises living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs."
It is generally agreed in economics that production satisfies material needs, which contributes to well-being (happiness). Therefore, production is the basis of utility. Increasing production increases utility in an economy and therefore, well-being and happiness. While material well-being is not the whole of human happiness, it is the foundation of Maslow's hierarchy of needs.
As far as I know, just about every economist agrees with this. Where some economists go wring is in equating material-well being with the total range of human well-being, which is patently false. For example, recent research shows that above a certain income — about 60-80 K, IIRC — even material well-being does not increase substantially.
What I see developing wrt MMR is a tendency to depart from standard economic terminology. If what the law says is that living standard is directly proportional to productivity, where productivity is defined as "the measure of a total output per one unit of a total input," why not use standard economic terminology. If that is not what it is saying, then I am confused about what it does mean in terms of economics. Is it meant to add something original. If so, what exactly?
Dan K: "Tom, It's up to 637 now. I gave up at around 500 or so. I juts saved the whole discussion to my desktop as a PDF, and it comes out to 212 pages!"
ReplyDeleteI read the first comments before I had to give up for lack of time. I thought the discussion was interesting and fruitful in the attempt to puzzle out the accounting wrt the economics. I think that this is significant, and if MMR continues in this vein, it can likely make some contributions to understanding of complex economic issues that are obscured by the way they are framed.
I say this as a philosopher of logic and language who is familiar with how apparent clarity results in seriou errors that just disappear when the use of signs as symbols is cleared up. According to the MMT economists, a lot of confusion in economics arise due to lack of clarity regard the accounting foundations.
So I'll follow your lead, Dan, and save the whole thread for later perusal. But in the end, I hope that it will be summarized in a working paper, which would state the conclusions clearly and more succinctly after the process of working though the details.
The reason that S = I + (S -I) is very simple.
ReplyDeleteIt's even simpler than you say, Neil. You give the reason why S is usually greater than I. But "S = I + (S-1)" is an arithmetic. The reason it is true is analogous to the reason that 12 = 5 + (12-5).
Even in a one-sector, closed private sector economy, S would still be equal to I + (S-I), and S would also equal I.
And in an alternative world in which the dollar was controlled and issued by private sector corporations, and the government had to acquire financial assets from the private sector in order to finance its operations, S would still be equal to I + (S-I). But in that world, I would typically be greater than S, and the private sector would have to run a deficit if government operations and financing needs were growing, just as in the real world the government sector has to run a deficit to allow the financial assets of the private sector to grow along with its increases in production.
But "S = I + (S-1)" is an arithmetic.
ReplyDeleteThat is,
"S = I + (S-1)" is an arithmetic identity.
To me it's obvious that MMR guys lack enough scientific backbone, but well, they are not at much disadvantage compared to the clueless economic establishment 6 profession so they can learn...
ReplyDeleteIt's bad to fall into axioms with little empirical backbone toe stablish them as observable events. Claiming something does not mean is true (or false), I hope they don't fall into some sort of 'praexology' non-sense to establish tautological 'facts' that do not have empirical basis.
@Shaun,
"Anyway if there is one thing that MMT can learn from the Austrians it would be the usage of Demurrage."
I suppose you are talking about 'real austrians' and not the economic school... Anyway, I used to be Geselian and probably till are in some way or an other, but I've doubts.Gesell analysis was very insightful and off course still applies to the deflation-inflation cycles, and was better developed by professional economists later on, Minsky to start with, but I'm not sure how the solution would work.
Alternatvie demourrage currencies have worked in the past (and do right now as there are some nice examples) to provide liquidity and act as an automatic-stabilizer which does not form part of the broader state monetary monopolistic system, but on a broad level how would work?
We already have some sort of demourrage, what bill Gross calls 'financial repression', CB's policies aroudn the world have been driving liquidity to some markets from others, but has it 'trickled down'? FED delusional ideology says that inflating prices in equity markets should help J6P, but it doesn't. Not only that but they are driving money to commodity markets creating assets price bubbles which hurt the purchasing power of J6P, who has stagnant wages as the shares of productivity are decreasing with labour and capitalists hoard more money (and anyway, if they didn't, it would increase inflation).
We have a very complex dynamic here that can't be easily solved; and we have real structural problems that are being overlooked. MMT can help fix some of it, demourrage could probably too, but there is a lot of stuff that is going on which has to do with productivity, resources, costs, the destruction of labour, etc.
Fixing all that will requiere compromise and effort and good analysis of what is failing, then we can invest and try throw money at it, but first we need proper economic analysis and to fix the POOR state of politics and democracy in the developed world (for this we must end the rule of neoclassical economics and neoliberalism and its infiltration, and get rid of the current elites or force them to change at least).
@Leverage
ReplyDeleteWrt 'physically' implementing demurrage, to me it is trivial. For example, keep a digital record of all units of currency, each unit depreciates per unit time. Nearly everyone uses money in electronic form. People could carry 'notes' as sms messages, paying each other with sms messages. That would cover nearly all of the population. At the end of every-day/week/month, remove a certain percentage from the system.
Perhaps your asking if it is politically feasible, well of course I can't give any straight forward ways of somehow getting demurrage accepted. Although it could be marketed as a 'Austrian' concept which may attract more mainstream support.
And I should clarify, and say that I don't thing that demurrage would solve all of the hoarding problems we may experience.
I thought it would be an additional piece that could be used to solve the 'economics jigsaw puzzle'.