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"Jasiek w japoonii - you are coming across as dogmatic, so I don't see any point in continuing. Sorry."

Sorry that you would't even try to understand Keynes' vision. Let me just comment on one of your paragraphs:

"So you consider that there were good investments going begging? My view of the real primary cause of the problem lies in disfunctional exchange markets - basically overvaluation of the US dollar - and the resultant chronic huge current account deficits - meant that there were hardly any profitable real domestic investments available to be found. Monetary policy had to be pushed to the zero bound to stop unemployment from rising."

[edited to end emphasis NR]

Such a monetary policy wouldn't work. With such an inelastic policy the unemployment will be left unsolved while the encouraged speculation will aggravate semi-inflation. In other words, that is the most dangerous method. It will aggravate the international imbalances of credit, and thus will inevitably result in a big war, because with the aggravation some eocnomies will try to eat and beat as some others try to collect loans and bills - both even by military power.



My previous post is for you.


Jasiek - re savings and investment - read this excellent post from a Keynesian (perhaps not by your definition).


"The real, unanswered question in economics seems to me how do we distinguish what world we are in, if we can be in both worlds, a Hayekian world or a Keynesian world. I explicitly forbid the use of politics or political dogma to justify answers to this question because I said both possibilities are valid and can happen."
"In Mr Rowe’s view, Keynesianism is identical with what you call American Keynesianism. In this regard, we are neither in a Hayekian nor a Keynesian world. Instead, we live in Keynes’ world."

No, the map is not the territory. We are in the real world. Why do people forgetting that. No model is true, it is just a more or less useful approximation.

No, Jasiek, I'm defining two cases. There are two flows, Aggregate Supply and Aggregate Demand. They meet and pair off. There can be three cases here. Supply can exceed Demand, and therefore there is Excess Supply, i.e. a general glut. Or Demand can exceed Supply, in which case we have a shortage economy.

In the interests of intellectual honesty I got the graphical basis for this analysis from Roger Garrison, however he's a committed Austrian and wouldn't like my Keynesian interpretations.

Illustrated graphically, it would look like the following. On the X-axis we have Consumption, and on the Y-axis we have Investment. We also have a circle of radius R defining the Production Possibilities Frontier. The Aggregate Supply function slopes downward to the left and the Aggregate Demand function slopes upward to the right. They intersect. Now, the key question is WHERE?

If they intersect below the PPF then Aggregate Demand is the limiting factor, and we have excess supply. The gap between the PPF and the equilibrium point represents the "Output Gap" we see in a Recession. If the economy is stable in this [C,I] position below the PPF, we have a Keynesian Depression. This is Keynes in a nutshell, the economy has reached a stable [C,I] position below the PPF with a stable output gap. There is idle capacity and persistent involuntary unemployment. This is exactly what happened in the 1930's and just the same problem we have today. The economy has received a shock that pulled it further away from the PPF. I will detail where this shock came from in a few paragraphs.

Now you can take two roads to getting the economy back up to the PPF. You can increase consumption, or you can increase investment. In this graph, the economy doesn't care which way you take. Which road you take is a policy decision. Note that since the economy is below the PPF no amount of additional investment directed into PPF expansion is going to help. Another of Keynes' points covered.

The second case is if the AS and AD functions above the PPF then Aggregate Supply is the limiting case, since the economy is not stable above the PPF. The economy WANTS to reach its equilibrium point but can't, yet. In order to do so it must have additional investment and therefore additional savings. This process, unique to this case, directs savings into new investment and therefore expands the PPF so that the equilibrium point can be reached.

A recession in a shortage economy is the inverse of a shocked Keynesian economy. Increased supply shortages of real goods, a decrease in aggregate supply cause a decrease in the PPF itself. The economy's desired equilibrium [C,I] point stays the same, but shortages pull it further away. This is what happened in the 1970's. The problem was oil. The United States was both a significant consumer and still self-sufficient until 1970. At that time domestic supplies were no longer adequate and the US was forced to rely on imports from either the Middle East or Canada. Either way more real resources were going to have to expended to get the same amount of oil. Bringing oil in from the Middle East in tankers or refining it from oil sands and shales requires more real resources. This is a shortage recession.

The question is what could induce a Keynesian recession, that is what could cause an economy to settle at a sub-optimal [C,I] point off the PPF. The answer is money. Nick constantly reminds us that we live in a monetary economy. Fine. Meet the Loanable Funds market. My model includes money, it even has its own unique graph.

OK, this part is more my original thinking, but it came to me last night.

The C-I PPF graph is directly related to the Loanable Funds market. The Loanable Funds Market graph has i, interest on the Y-axis and Loanable Funds for savings and investment (SI) on the X-axis. The PPF has direct counterpart here. The circular PPF with a [C,I] point is mapped to the circular Money Supply Frontier with a unique [i, SI] point. The Money Supply Frontier contains the Money Supply inside it. This is the size of the loanable funds market. If you are inside the MSF then a bank will loan you SI funds and i interest. If you are outside the MSF then the transaction can't be completed, the rate and loan size are unsatisfactory.

Look closer. The MSF explictly illustrates "broad money", money loaned out by banks in fractional reserve banking. It also has a place

Remember how I showed that a Hayekian recession is caused by a supply shock and therefore a negative transformation of the PPF? Well the same can happen here. Increase loan defaults. That means that at the current [i, SI] point is unsatisfactory. The Money Supply Frontier will contract. That means the Money Supply will contract.

OK, lets go back to that [i,SI]->[C,I] mapping. If the Money Supply contracts because banks are re-evaluating their credit terms then that shift will drag the [C,I] point down with it. This is how the economy settles into a Keynesian Recession. It's exactly how the Great Recession happened.

In summary: A Hayekian recession is where we have a working Loanable Funds market and have a real goods supply shock that reduces the PPF. The PPF is the culprit. A Keynesian recession is where we have a working PPF which stays the same, but a credit crunch in the Loanable funds market which drags the economy away from the PPF. The Loanable Funds Market and the MSF is the cause of the problem.

Some of this represents raw thinking and but it does answer three of my nagging problems: how we can have different types of recessions with different causes and cures, how we can incorporate money into a macro model and how a problem in the banking sector can cause a real negative economic adjustment.


As for the linked essay my Mr Andy Harlass:

- The equation between the total quantity of investment and the total quantity of savings is achieved to make a state of equilibrium, and thus investment is not identical with savings. I think this brief explanation may cause a misunderstanding. So, let me elaborate a bit below:

- Mr Harlass regards it as a delusion that output and (household) income are synonyms, because he thinks “output (always) equals consumption plus investment”.

- Keynes doesn’t say so: He says “output equals investment-goods plus consumer goods”. There we find a decisive difference between Mr Harless’ view and Keynes’ view.

- That’s why Mr Harless introduces the distinction between benefits everything produced has in the present (“consumption”) and benefits it will have in the future (“investment”).

- Obviously, he is mixing up savings with principals.

- By saying “The payer is purchasing something, and it must be either for consumption or for investment”, he also obviously regards investment as not savings. In Keynes' analysis of household income, Keynes regards what Mr Harless here regards as someone’s investment as still the same person’s savings. Thus, in Keynes’ vision household income is identical with the sum of savings and consumption. Mr Harless’ vision, in which household income is identical with the sum of savings, consumption and investment, contradicts Keynes’ vision.

- Inventories are a form of investment thus a form of savings in Keynes’ vision, which Mr Harlass, who distinguishes savings from investment, doesn’t understand. If consumer-goods haven’t been sold yet they still are investment-goods. Producers expect those stocked consumer-goods to be consumed (i.e. consumption by households), but while the other investment goods have already purchased thus created accounitng profits the consumer-goods in question haven’t been consumed yet thus haven't created any profits yet. Those stocked consumer-goods, still not counted as consumption, haven’t created profits but have been creating various costs, which please everybody notice to understand why, unlike Mr Harlass, Keynes’ doesn’t think that “output (always) equals consumption plus investment”! In Keynes’ vision, the total amount of consumption only equals the total amount of ‘sold’ consumer-goods, which makes a certain state of equilibrium at a level where all the produced consumer-goods haven’t been consumed yet. This creates involuntary unemployment. Mr Harlass doesn’t understand Keynes’ vision.

- Therefore, inventory is a very important factor, which Mr Harlass doesn’t understand. This implies the mechanism of Richard Koo's 'balance-sheet recession'.

- Mr Harlass makes microeconomic analysis to deal with savings, which may highly probably be the very cause of his misinterpretation of savings and investment. This is a typical classical method, which makes a fallacy of composition, and not Keynes' method.

- The reason why I oppose Mr Harlass’ view is not that there is causation running from savings to investment, needless to say.

- When the US government is saving a trillion dollars, it is definitely a form of investment even it stays in the form of cash. If in cash stored in the public coffer, it means that the government is investing the trillion dollars into cash. The ‘own rate of interest’ of cash is the highest of any assets.

- Mr Harlass says: “…they are the human counterpart of banks’ excess reserves. In real terms, they represent the idle portion of our national savings.” That’s a typical of those who believe that Say’s law not only is theoretically true but also has ‘realistic validity’ in the real world. Classicists and Austrians have this view in common to eventually draw out inhumane conclusions that those fixed factors of production are nothing but ‘frictions’.

- Mr Harlass’ interpretation of the fact that investment decides savings sounds bizarre, to be honest. Investment decides savings indeed. But, that is not because someone’s payment initially becomes the receiver’s savings but because the total amount of savings equals with the total amount of the money, including interests, invested so far. In other words, the total amount of savings is the current total value of savings, and not the total book value of savings.

- In conclusion, Mr Harlass is a typical ‘American Keynesian’, which the author Mr Rowe calls ‘Keynesian’, and definitely not among those who follow Keynes’ vision but obviously among those who follow (neo-)classical economics, which Paul Samuelson calls ‘mainstream’ economics.

To be honest, to read through a lengthy description of such a complete misunderstanding is quite an agony, especially now late at night after work. It is rather meaningless! @Reason, I thought you were presenting some new idea by the link, but it turned out to be another American Keynesian cliché, which is just pathetic to put it mildly.



I’ve been too tired of typing by now to go on to your messages. It's already past 02:15AM over here. Tomorrow I may reply to your two posts dated March 24, 2011 at 02:58 PM - unless I am too sleepy. So, never write to me until then, or the discussion will be ramified to make it even more troublesome for me to reply to you again.



By the way, Mr Haless’ trichotomy on household income:
household income ≡ consumption + investment + savings (1)
is very similar to the classical economics’ trichotomy:
household income ≡ consumption + purchase of real assets + purchase of financial assets (2)

If you view the whole eocnomy:
savings = purchases of real assets + purchases of financial assets (3)
But, someones' purchase of financial assets is someone else's issuance of assets:
purchases of financial assets ≡ 0 (4)
By (3) and (4):
savings ≡ purchases of real assets (i.e. investment) (5)

(5) means that the schedule on savings is identical with the schedule on investment, and thus Say's law is always valid on any variable.

That's the way classical eoncomists like Mr Harlass think. Mr Harlass is a Keynesian? Yes, he is an American Keynesian indeed.

Good night.


Jasiek, your derivation doesn't look at the logical implications of your final conclusion.

savings ≡ purchases of real assets (i.e. investment) (5)

Well, I have in my left hand a schedule of savings. I have in my right hand a schedule of investment. Which one is lesser? If you assume that Savings < Total investment possibilities, then yes savings will equal investment. But what of the flip side, if Savings > Total Investment Possibilities, that is the investment schedule is the limiting case? Well, the excess "saved" funds will flow into financial instruments.

Your conclusion (5) doesn't hold unless you issue further clarifications. Your definition isn't commutative, that is it isn't reversible. For example, B*A = A*B if I use integers, but not if I use n-dimensional matrices. When we have a schedule of something we have a matrix and some of the our ingrained habits from dealing with real number arithmetic don't apply anymore.


I told you not to write to me until I come back today!

Re: Your post dated March 25, 2011 at 03:44 PM

Firstly, I wondered why you were saying such a thing, and re-read my post dated March 25, 2011 at 01:57 PM to find I had mislead you. I presented (3) as just an equation, but it is actually be more than that: It should be the following congruence:
savings ≡ purchases of real assets + purchases of financial assets (3’)
Therefore, by (3’) and (4):
savings ≡ purchases of real assets (i.e. investment) (5)

Secondly, you introduce the notion of total investment possibilities, but that’s meaningless. Regardless of such ‘possibilities’, (5) explains the quantitative identity between (the matrix of) savings and (matrix) of investment. If we observe the ‘classicist’ trichotomy of (2), there can be no room for “excess saved funds” anywhere in there. That is, both the right-hand side and the left-hand side are present values, and no potential value is implied anywhere between them. When you purchase either real assets or financial assets those become your savings, and when you save money you buy either real assets or financial assets.

Re: First of your posts dated March 24, 2011 at 02:58 PM

Simply, your lengthy explanation means nothing but:
(appropreate) income (Y) = income in the state of full employment (Yf) (6)

Re: First of your posts dated March 24, 2011 at 02:58 PM

Simply, your lengthy explanation in the first half means nothing but:
savings as function of market interest rate and output (S(r, Y)) = investment as function of market interest rate (I(r)) (7)

If we are to re-write (6) and (7):
Y = Yf ---(6)
S(r, Y) = I(r) ---(7)

Classicists, therefore, think that when (6) is not achieved there must be frictional factors (such as high wages and regulations) that are impeding Say's law, and thus they try to eliminate them. Austrians hate frictional factors regardless of the equation. (On the contrary, Keynes regard these factors as just normal, realistic and human. Certainly, he can become an honorary Buddhist).

As for the second half of the post, the Loanable Funds Market graph is, though interest is on the X-axis and savings and investment are on the Y-axis, in Chapter 14 of General theory. This graph is very famous because it is the only graph Keynes presents in the book. So, you needn’t explain it to me. By using the graph Keynes criticises the ‘classical’ economics that when the curve of the investment-demand schedule (X-curve) shifts we don’t know which is the appropriate curve of the amounts saved out of an income to various levels of the rate of interest (Y-curve) will be, thus we don’t know at what point the new X-curve will cut the new Y-curve. Thus, by this analysis we don’t know what the appropriate market interest rate will be. That is, your ‘purely classical’ vision doesn’t give the appropriate market interest rate. As long as I remember, Keynes said that this mistake (by classicists) originates from regarding interest as the reward for waiting for ‘not-hoarding’.

Contrary to your ‘classicist’ view, instead of (7) Keynes introduces the notion of liquidity preference (L) as function of income (Y) and market rate of interest (r) as equal with the quantity of money (M):
M = L(Y, r) ---(8)
By (7) and (8), the state of liquidity preference and the quantity of money decides the market interest rate.

The above is a key to tell the difference between the classical economics including (American) Keynesianism like Mr Harlass’ and the economics of Keynes. Your last three posts have made thus clear that you don’t understand it - I am very sorry.



This is a blog, not your personal forum. You can't tell anyone to do anything around here.

Second, you still haven't told me which is limiting case, savings or investment. If people save will they exhaust their savable funds first or the list of investments they consider appropriate to save in? Which function is the limiting case? This is a simple question.

Actually, neither you, Keynes or Roger Garrison the Austrian whom I lifted most of my post from included the last bit in my second post, the Money Supply Frontier. That was my original thinking. Keynes doesn't have it in his book in his Loanable Funds graph, Garrison doesn't include it either, but it makes a great deal of sense to me. It defines the limit of the money supply. Money is the choke-point in a monetary economy. Transactions from Goods A to B all go through the money. Therefore every transaction needs to pass through the Loanable Funds Market because every transaction needs to access money.

My Money Supply Frontier is defined by credit quality, since money is a product of the banking process. Deteriorating credit quality, i.e. increased defaults will cause banks, the explicit actors here, to reduce their loans and therefore decrease the money supply. That's just describing Banking as it happens in real life.

In a normal economy the interest rate is off the Money Supply Frontier. We can play with it as much as we want in order to induce an economic change. There is nothing "natural" about it, it merely describes the function of supply and demand for funds at a given time, which should be enough to satisfy an economy's need for funds. But if the MSF contracts due to deteriorating credit quality and decreased lending by banks, then there is no interest rate adjustment that you can do to grow the economy because that move is precluded by the location of the MSF. So you need more money, that is bills or other direct liabilities of the central bank. You need to create more money to expand the MSF and commerical banks often can't do this. This is the world Keynes was describing.

I'm saddened Jasiek that you seem so dogmatic. All you have managed to do is quote chapter and verse of the General Theory. I would appreciate some more original thought.



First, I haven’t told anyone to do anything. I just need you to understand Keynes’ vision so that the argument won’t go round and round in circles any more.

The big problem here is that you haven’t understood Keynes’ vision yet. In his view, savers don’t decide all investment activities. Investment decides savings. Your misunderstanding originates from the fact that you stick to the classicist interpretation that savers (i.e. individuals) decide the whole amount of investment while Keynes uses a dichotomy in understanding income both through household and production in an attempt of avoiding adopting Say’s law to the real world. Please don’t ask me such a silly question anymore. Please build a meaningful question after you have understood Keynes’ vision.

Keynes does have the notion equivalent of what you call the Money Supply Frontier. His is, unlike your static ‘frontier’, not a frontier but a schedule decided by income and market interest rate. It changes by income and market interest rate. This is called liquidity preference. Money supply, or amount of money in Keynes’ words, is thus the function of income and market interest rate. Only by introducing liquidity preference does an analysis by the Loanable Funds Market is meaningful, because without it the analysis cannot decide an appropriate market rate of interest. I explained this to you in my previous post, but you haven’t understood yet.

It is no doubt you, not I, that are dogmatic. The objective method is that you understand Keynes’ vision first and compare it with the vision of classical economics and Austrian school even if we are to talk about an ‘original thought’. I have been telling you to take this method, but you wouldn’t even try to understand Keynes’ vision at all. This is not academic. Thus, the argument doesn’t progress. Very very sad. Please come out of the cave first.

I now wonder if your obstinancy represents the present level of economics in North America. If yes, I can be natural that Ben Bernanke has been adopting such a barbaric aggregate-demand control policy, splashing the plague of escalating speculative activities. In that case, it is highly likely that the Fed will someday raise interest rates against semi-inflation without the government moving to discourage the income velocity of money, resulting in a pop of the present huge bubble.


I never said my Money Supply Frontier couldn't change. I in fact said it could change grow or shrink, based on multiple factors. How and why it changes are the important economic shocks and policy responses that my little model attempts to help explain. My model can be made to behave in a completely Keynesian way, under certain conditions It can also behave in a Hayekian way given other assumptions. It can even switch between the two. It does show what conditions hold for a classic Keynesian recession with an output gap to occur and why the funds market and money supply matter because they drive such a recession in the first place.

I also never, ever said that savings drives investment. I am completely comfortable with a world where the list of investment possibilities is what drives savings. So is my model. It can also accommodate a world where savings drives investment, but that is frequently not the case.

Second, I am a Canadian. I live in a different country than Ben Bernanke and my central bank, the Bank of Canada, is a completely different creature. This is a Canadian blog,.after all.


Quote: “I never said…multiple factors….attempts to help explain

According to General Theory, money supply changes by liquidity-preference whereas liquidity-preference changes by income and interest rate. Money supply and income decide interest rate. On the contrary, your typically classical idea of Money Supply Frontier completely lacks the mechanism as to how the present level of money supply and present level of income decide the interest rate. This is typical of the classical economics both as I have been explaining quite a few times and as Keynes criticises by bothering himself to draw the famous graph. Your literacy has caused some suspicion in my mind about your personal background, but I won't deal with it here.

Also, your Possible Production Frontier doesn’t explain how its position on the graph is decided. Instead, I would present the notion of production curve. A production curve describes the monetary wages as a function of the volume of labour supply. Its shape is like ‘S’: When the X-axis represents volume of labour supply and Y-axis monetary wage, the curve, which starts from the origin, increases gradually more steep and then gradually less steep as the labour supply increases. A postulate of the mainstream economics (i.e. (neo-)classical economics, including American Keynesianism) is that the (real) wage is equal to the marginal product of labour. This postulate means that the straight line, which starts from the origin with the inclination that represents real wages, comes in contact with the production curve at a volume of labour supply and that at that point does the economy enjoy the largest possible gain (i.e. volume of production at your ‘frontier’). Keynes says that he “shall maintain the first postulate as heretofore”. That makes me smile every time I read it, because General Theory is written to regard perfect competition as unreal: He is thus charming. By the time you have read through General Theory you may have understood that the case when actual volume of labour supply does not stay at the level where the straight line comes in contact with the ‘S’ curve is just normal whereas the case when actual volume of labour supply comes at the level where the straight line comes in contact with the ‘S’ curve is just accidental.

Quote: “My model can be…completely Keynesian way,

Indeed. Completely American Keynesian. That’s Samuelson. That’s part of Hicks’ explanation on short-term equilibrium, which has misled a lot of people against his intention. Not fundamental to Keynes’ theory.

Quote: “under certain conditions…Hayekian way given other assumptions…between the two.

American Keynesianism and Austrian school economics have in common – as I have explained.

Quote: “a classic Keynesian recession”

No. That’s about a classic ‘American Keynesian’ recession. Keynes explains recession in a fundamentally different way.

Quote: “I also never, ever…what drives savings. So is my model.

What I understand about your 'model' is that 'investment possibilities' may drive savings when the present amount of savings decides the present amount of investment. Thus, you are still maintaining that savings decide investment.

Quote: “Second,…

I know this is a Canadian blog from the first place.

In conclusion, as long as you keep refusing to understand Keynes’ vision this discussion is meaningless. It’s solely your trollish attitude that is to blame. That’s very dishonest to put it mildly. I am getting tired of talking with you, to be honest: I have lost interest in this conversation. I’d suggest that you shouldn’t come back to this topic until you have read through General Theory.


PS Even the background idea of the trendy ‘Black Swan’ hypothesis originates from Keynes (or actually from his ‘Circus’). Read his argument about probability and roulette in General Theory. I distinguish the mah-jongg sorts of probability from the roulette sorts of probability. We definitely live in Keynes’ world and nowhere else. The shock of a black swan depends not only on the black swan itself but also on money supply whereas multiple of high-powered money, which is identical with money supply, depends on liquidity preference, a function of income and interest rate with income velocity of money as an invariable. That’s why I presented the three stage method in one of my previous comments on this entry.

Whatever. Sixty years of scholarship have moved beyond Keynes. Such is the life of the academy.


Now I happened to be re-reading my previous post by mobile phone, and I have just found a big typo (?) on production curve: While I wrote ‘labour supply’ I meant actually not ‘labour supply’ but ‘labour demand’ (demand for labour by employers)! I am very sorry for my poor English….

In reply to your previous post, you are bright indeed, and I don’t doubt it. But, sadly, you seem to have wasted your own intellectual resources and time for special theories (while I have been lazy in brushing up my English as a foreign language). People have done likewise since early 1960s. If only you have read through General Theory: This would be the only way this conversation is useful, and with this conversation I believe that you will understand the heart of his theory despite the fact that Keynes says something like there are not many in the field of economics and politics who are influenced by theories that are new to them after they are twenty-five or thirty years old such that the ideas which policymakers and even agitators apply to present events are not likely to be the newest. (He doesn’t question the logical consistency of each ‘special’ theory but only regards its validity in the real world as highly questionable. That’s why he is virtually Buddhist albeit not nominally, as he regards it as useless for human being to try to take God’s role while it is useful to guess how God thinks). Thanks anyway for maintaining your self-control while I was about to fail to (as you see from my wrong usage of English words, possibly being drowsy at around 01:00AM local time).


Look you make several important errors in your discussion of the Harless article.

Perhaps you really were tired.

"The equation between the total quantity of investment and the total quantity of savings is achieved to make a state of equilibrium,"

No this is NOT an equilibrium condition at all - it is an accounting identity. Please note Andy Harless makes a careful distinction between Income (Money) and Output (Physical) to try to clarify this. People cannot have (money)income unless someone spends the money - (either for consumption or for investment). Of course in the short term - some of the investment may be in the form of inventory investment - he just explicitly omits this from most of his discussion for simplicity and clarity.

"By the way, Mr Haless’ trichotomy on household income:
household income ≡ consumption + investment + savings (1)
is very similar to the classical economics’ trichotomy:
household income ≡ consumption + purchase of real assets + purchase of financial assets (2)

If you view the whole eocnomy:
savings = purchases of real assets + purchases of financial assets (3)
But, someones' purchase of financial assets is someone else's issuance of assets:
purchases of financial assets ≡ 0 (4)
By (3) and (4):
savings ≡ purchases of real assets (i.e. investment) (5)

(5) means that the schedule on savings is identical with the schedule on investment, and thus Say's law is always valid on any variable."

Say's law doesn't hold because of MONEY and in the case of MONEY, purchase of financial asset (if money is such) !=> sale of financial asset (at least not by any agent counted as part of the economy).


Look I think you totally misunderstand what Andy Harless was getting at but in particularly here:

"Mr Harlass’ interpretation of the fact that investment decides savings sounds bizarre, to be honest. Investment decides savings indeed. But, that is not because someone’s payment initially becomes the receiver’s savings but because the total amount of savings equals with the total amount of the money, including interests, invested so far. In other words, the total amount of savings is the current total value of savings, and not the total book value of savings."

you show you haven't understood him at all. For a start be careful about confusing flows and stocks - with savings, I now the word itself is ambiguous. The key in his post is:
"Net saving occurs whenever someone receives income that is not offset by the payer’s dis-saving. That can (and will) happen only when the payer is investing."

I KNOW the word itself is ambiguous.

And note the last sentence itself is true only AS AN ACCOUNTING IDENTITY. When a firm invests it takes the money used from its cash account and adds to its fixed assets account. If it consumes - it treats the consumption as just vanished from the books. In a sense this is somewhat arbitrary. Consider for instance consumer durables. Or intermediate goods. All (at least most) investment goods are eventually consumed via depreciation. But OUTPUT = indeed (as you say and Andy Harless implies) goods for investment (including inventory) + goods which are consumed.

Actually Jasiek, I have read the General Theory.

If you go and download Roger Garrison's presentation on "Capital Based Macro" you'll see the linked three-graph diagram which I modified. In it he shows how in a functioning Loanable Funds Market, that is with an economy on a [C,I] at the Production Possibilities Frontier ("Full Production") can have a determinate interest rate. This is a Classical Economy and it requires both full production (economy on PPF) and a working loanable funds market.

However in an economy that is not at full production where the Money Supply Frontier is the limiting case, the intersection of the Savings and Investment curves lies beyond the Money Supply Frontier. We don't have enough money, period, to reach that equilibrium point and no interest rate adjustment will get you there. The money supply itself has to be expanded AND that money has to be invested to move the economy back to the PPF. The key here is "Credit quality".

The third graph, a Hayekian Triangle, shows how an economy that suffers a money supply contraction (brought about through a credit crunch in the banking sector) can drag an economy off the PPF and lower the whole level of economic activity like a lawnmower.


1. Your first argument:
No. Mr Harlass divides an economy into individuals, and that’s not Keynes’ way of analysis but classical. In this regard, Austrians adopt the same notion as that of the classical economists and you are following Austrians. In contrast, Keynes divides an economy into three – enterprises (i.e. what Keynes calls investors), workers and rentiers – and, as pure workers and pure rentiers have the spectrum in between, put the two together to simply call the group ‘households’. Enterprises produce goods (and services) whereas households either save or consume their incomes. The amount of savings can propagate even though individuals haven’t deliberately put extra money into savings, because the extra money is automatically counted as the increased amount of savings, which you don’t understand. You still believe that savings propagate because savers deliberately put money into their savings. No, that’s not the way things are. You don’t really understand what credit creation is. Mr Harlass didn’t, either. The deviation from the state of full employment is understandable only when you divide an economy into enterprises and households as Keynes does.

2. Your second argument:
No. The lump sum of financial asset purchases is identical with the lump sum of financial asset sales, and the two activities take place at the same time.

3. Your third argument:
No. As I said above, Mr Harlass’ fallacy comes from dividing an economy into individuals. When a household has earned income its savings propagate, but this marginal increase of income has automatically and simultaneously been invested. In this view, even holding cash is a case of investment. Disinvestment occurs when the household consumes. This ‘investment’ is different from the ‘investment’ on the book as a matter of course, but that’s Keynes’ method of analysis, by which households don’t invest but save whereas enterprises invest. Thus, American Keynesians’ view, based on individuals, is fundamentally different from Keynes’. Theirs is identical with classical economists’ in this regard. Please refer to my reply to Determinant posted below, and that may help.

(I feel sorry for explicitly saying no, no and no, but this is the best way to clarify my points. I hope you won’t feel offended).



Do I have to bother myself to read a lengthy material again just to reply to you in such a ramifying talk? I’m sorry but I won’t anymore. That’s too bothering. Let me answer to what you intend to say to me as far as I can guess from your posts.

First of all, think twice what full production is, and you will know the notion is extremely obscure: It doesn’t explain in what case in terms of variables the state of full production can be attained.

On the contrary the standard classical analysis of aggregate production curve suggests the conditions for the appropreate relation between the average monetary wage and the volume of employment. (Even Keynes thinks of this kind of analysis in Chapter 2 though he doesn’t present a graph). There were two careless mistakes in my explanation of the graph in my post dated March 28, 2011 at 11:41 AM. I may have confused you due to the mistakes. So, let me explain once again:

An aggregate production curve describes monetary wage as a function of volume of labour (<= I said ‘labour supply’ by mistake last time – first mistake). Its shape is like ‘S’: When the X-axis represents volume of labour and Y-axis monetary wage, the curve, which starts from the origin, increases gradually more steep and then gradually less steep as the volume of labour increases. A postulate of the mainstream economics (i.e. (neo-)classical economics, including American Keynesianism) is that the (real) wage is equal to the marginal product of labour. This postulate means that a straight line, which starts from somewhere at a negative point on the X-axis (<= I wrote ‘the origin’ last time by mistake – second mistake. I’ve just found this mistake. I must have been too drowsy then.) with the inclination that represents the real wage, comes in contact with the production curve at a volume of labour and this point shows the demand for labour on the real wage. At that point does the economy enjoy the largest possible gain.

Your background idea is that enterprise can be a fully variable body that consists of individuals thus a non-frictional allocation of scarce resources, which is identical with your ‘full production’, is achievable. That is fundamentally classical.

On the contrary, in Keynes’ view every enterprise is an organic body that consists of material, immaterial and human factors and purchases variable factors to produce goods (incl. services). Its present capacity of production is decided by the fixed factors of production that it has accumulated by now. It makes investment to further accumulate fixed factors of production in an attempt of earn income in the future. Thus, an enterprise at present is an aggregate of fixed factors of production at PRESENT as a result of all the investment activities it has made in the PAST based on the long-term expectations it had built for a long time, of which American Keynesians, whom Joan Robinson used to call Bastard Keynesians, already included into the ‘mainstream’ economics, always make light. So, those ‘bastards’ treat the production-curve analysis to be static, which means that they treat the first postulate of the classical economics as given. They believe, therefore, that a favourable sort of equilibrium is attainable by a one-shot-trick policy-package such as QE, inflation-targeting or quantity-base infrastructure-project. (Boo! Boo! Boo! Wrong! Wrong! Wrong!) Considering both the fixity of enterprise and the discrepancy between the actual state at present and long-term expectations in the past, Keynes concludes that the proposition that a proper allocation of scarce resources (i.e. a state of the Walrasian equilibrium or what you called full production) is always possible by either doing something or not doing anything to the economy is unreal and thus invalid. Keynes implies this conclusion of uncertainty (i.e. ‘mujo’, not mojo, in Japanese Buddhist terminology, meaning general transience of phenomena) all through The General Theory and this is the core of his whole idea, which you don’t seem to understand: That’s a problem. Agree or not, you need to understand that point in the first place, or the conversation will go cross-purpose for ever. Certainly, you must read The General Theory again. I’m not Keynes in the first place, such that unless you’ve understood his idea we can’t go on with this discussion.



Your dogmatism, condescension and outright preaching are insulting. Frankly you have been a troll and it is my fault for feeding you.

I invite you to watch this blog in the future as I think I may submit a brief article on my graphical analysis.

Determinant: cool it please.


O, that’s an ad hominem. Be relaxed. I’m not insulting you at all but just trying to explain the point I think you have been overlooking. If I really intended to insult you I would have ignored you. Now that I’m talking to you, you may take this as from my sincerity and that’s exactly what I want you to. Peace.

Love and regards,

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