Why "saving" should be abolished

I mean the concept, not the activity. Because it's the most confusing concept in macroeconomics.

Let's take a very simple macro model with no exports, imports, government spending, or taxes. There are four goods: a flow of newly-produced consumption goods C; a flow of newly-produced investment goods I; a stock of antique furniture A; and a stock of money M.

It's a monetary exchange economy. There are three markets: a market for C; a market for I; a market for A; and that is it. There is no market for M. Or rather, all the other three markets are markets for M, because all the other three goods can only be bought and sold for M. Barter is banned.

There is a tabu against using the C and I you have produced yourself. You can only use the C and I you have bought from someone else. So you want to sell the C and I you produce, and buy the C and I someone else has produced.

Just to keep it simple, there are no unsold inventories of C and I. You only produce C and I when a buyer appears with money and wants to buy some of your produce. Think of C and I as services, or goods made to order.

Income Y is defined as C+I. Y=C+I is true by definition.

Saving S is defined as Y-C. So C+S=Y is true by definition.

Therefore S=I is also true by definition. It follows immediately from C+S=Y=C+I, when you subtract C from both sides.

These all refer to actual quantities produced, bought and sold. All of that was accounting. Notice that A and M appear nowhere in those accounting identities.

This is the bit that people may miss: all of that was only true at the aggregate level. At the aggregate level it is true that income from the sale of C+I must equal expenditure on C+I. The aggregate quantity of C+I sold must equal the aggregate quantity of C+I bought. If an apple is sold, it must be bought. But that is not true at the individual level.

Let's repeat the accounting at the individual level.

An individual's income y, from the c+i that individual sold to someone else, can be used to buy c from someone else, or else saved s. What can an individual do with his flow of saving? In this model there are three things he can do with his income [I meant saving]: buy investment goods i; buy a flow of antique furniture delta(a) to add to his existing stock; hoard a flow of money delta(m) to add to his existing stock.

An individual's saving means anything he does with his income except spend it on newly-produced consumption.

Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don't know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don't know which. And it really matters which. As I shall show.

That's why "saving" should be abolished.

Having got that accounting out of the way, let's start thinking about Keynesian macroeconomics.

"What is the effect of an increase in desired saving by all individuals?"

What a badly-posed question. We know they all want to buy less consumption goods, but what of those three possible things do they want to do more of? The question does not say. So lets take all three in turn.

1. Investment. Demand for newly-produced consumption goods falls and demand for newly-produced investment goods rises by an equal amount. Total demand for newly-produced goods stays the same. So it's a wash. (Hush, you microeconomists, and Austrians!) No recession.

2. Antique furniture. Demand for newly-produced consumption goods falls, and demand for a flow of antique furniture increases by an equal amount. What happens?

This one's a bit tricky. To keep it simple, let's assume a representative agent model where everyone is identical so there is no trade in antique furniture in equilibrium. If everyone wants to buy more antique furniture, and nobody wants to sell, there's excess demand for antiques. What happens next?

Either the price of antique furniture rises to clear the market or it doesn't. If it rises to clear the market each individual will stop wanting to buy more antique furniture and will reformulate his plans. If it doesn't rise to clear the market each individual will be unable to buy more antique furniture (because none will find a willing seller) and will reformulate his plans. Either way he will reformulate his plans. He either chooses not to buy more antiques or can't buy more antiques, and so must do something else with his income instead.

If he reformulates his plans and decides to increase desired consumption back again there is no recession.

If he reformulates his plans and decides to increase desired investment there is no recession.

If he reformulates his plans and decides to hoard more money, see below.

3. Money. Demand for newly-produced consumption goods falls and demand for a flow of more money increases by an equal amount. Each individual wants his stock of money to be increasing over time.

Money is the medium of exchange in this economy. That makes it very different from antiques. If you want to increase your stock of antiques, you must persuade someone else to sell some of his. It's not something you can do by yourself. If you want to increase your stock of money,  you just buy less. Nobody can stop you buying less. There's a recession.

You see? Even in this incredibly simple stylised economy, to talk about the effects of an increase in desired saving is incredibly confusing. All because saving is a non-thing. It can mean any one of three things, even in this incredibly simple stylised economy. And those three things have to be analysed in three very different ways and have very different consequences.

That's why "saving" should be abolished. Talk about something else instead. Talk about a switch away from desired consumption into more desired something else, and specify what that something else is. Because it matters.

Comments

[marcus nunes]

A beautifully built "coffin" to the concept

[Bob Murphy]

It seems Nick that you are arguing that the concept of saving cannot coexist with Keynesian macroeconomics. I vote to abolish the latter.

[Nathan Tankus]

Why didn't Keynes come up with a way of dealing with this problem? oh wait. he did. it's called liquidity preference. By the way it's fundamentally misleading to claim that individuals demand newly produced investment goods. Individuals seek out consumer durables and higher nominal yields on assets. In a monetary economy that doesn't have to have anything to do with producing investment goods. part of that savings may be used to purchase equities or bonds but that isn't necessarily used to produce investment goods. Instead, firms invest in new capital when they think they will need more capacity to meet consumer demand in the future. Investment responds to effective demand, or as Keynes said, Investment creates savings, not the other way around. Just because financial investors shift in and out of financial products of corporations who hold investment goods as assets doesn't mean the increased savings is creating demand for investment goods. We should keep the concept of savings.

[Nick Rowe]

Thanks Marcus!

So Bob, when an Austrian talks about "an increased desire to save", what do you normally understand by that? We know it means a fall in the demand for newly-produced consumption goods. But what do people plan to do with their income instead? What do they demand more of? Antique furniture?

[marris]

To be pedantic in the analysis of (3): Once we look at the scenario where money stock is increased, do we need to go back and ask whether the C market will clear at the new, lower demand? This is analogous to the case-by-case analysis of the antique market. If C sellers are willing to lower their offer prices, then the C market would clear. Would that mean no recession? Just an adjustment to a lower price level?

[Scott Sumner]

Good post--I have a new one too.

[Joe]

Nick

I think the way to solve this issue would be to convert each element of Keynesian liquidity preference and IS/LM into Monetarist thinking, like the equation of exchange.

[Nick Rowe]

Nathan: "By the way it's fundamentally misleading to claim that individuals demand newly produced investment goods. Individuals seek out consumer durables..."

Consumer durables are investment goods. Even Statistics Canada treats some consumer durables, namely newly-produced houses, as investment.

You want to introduce bonds, and firms too Fine. But that just complicates the meaning of "saving" still further.

And I don't remember antique furniture in the General theory. You can't leave that out. We buy lots of goods that are not newly-produced goods. Land, old houses, old cars, etc. Why this Keynesian fetish for the new?

[Bob Murphy]

Nick Rowe wrote: So Bob, when an Austrian talks about "an increased desire to save", what do you normally understand by that? We know it means a fall in the demand for newly-produced consumption goods. But what do people plan to do with their income instead? What do they demand more of? Antique furniture?

Nick do we need to abolish the concept of "hunger"? I mean, you know it means I want to eat, but what? Burgers? Antique chairs? It's so imprecise.

[David Watts]

It's disingenuous to say that Keynesian macroeconomics has a problem with 'desired savings'. I think you probably mean Neo-Keynesian economics.

Keynes covers exactly this question in the General Theory. The only difference is that for antiques he uses existing capital goods.

Keynes points out that money is a liability of some other agent, which must therefore have an offsetting asset. Money can either be a liability of the government (but you have no government in this model) or of a bank. That means the bank's ability to accept your deposit (and your willingness to accept the bank's deposit as money) is dependent on the bank finding an offsetting asset (someone to lend the funds to). That borrower will presumably use it to build new capital (I). The future production of goods and services from the building of that capital good (I) will allow the borrower to service the bank loan which gives the savings value.

In terms of the problem with antiques, their purchase simply leaves someone else with the money and doesn't change the fact that the seller must either decide to spend the money on C, employ labour and resources to build new capital (I) or leave it in the bank and ask them to find someone to borrow the money. The purchase of antiques doesn’t destroy money and it doesn’t act as a saving because antiques have no guarantee of future cash flows, they're only worth what the next person will pay for them.

Keynes's point is that saving is always a residual of what is left out of income that isn't consumed on currently produced goods and service. But people are only able to save that leftover income to the extent that someone else is prepared to borrow the money and spend it on I. If no one is prepared to borrow the money, then incomes will fall. It is I that determines how much we can save, not C or Y.

Keynes's argument is vastly more nuanced and detailed than my attempt above so please excuse any simplification.

[Ralph Musgrave]

Strikes me the whole problem solved by making it clear when using the word “saving” whether one is referring to saving money or saving up real assets (i.e. increasing investment).

[rjs]

while youre at it, you can also abolish sovereign debt...too many economists confuse it with household debt...

[Kevin Donoghue]

Nick, I'm pleased to report that the index to Bénassy's macro textbook does not include the word saving. There is one passing reference to the savings rate, in the context of the Solow growth model. It's also gratifying to note that there is no reference to the quantity theory of money or the velocity of circulation. Little by little the garbage is being cleared out.

[Artturi Björk]

So isn't the disagreement about what happens if in 3. the central bank accommodates the rising demand for money?

If in this case there is no paradox of thrift, then wouldn't it mean that there is no scenario where there is one?

[JKH]

“Saving" should be abolished ... I mean the concept, not the activity. Because it's the most confusing concept in macroeconomics.”

No.

“An individual's saving means anything he does with his income except spend it on newly-produced consumption.”

No.

It does not “mean” that at all.

Saving stops at the point where saving has been measured as a subset of income.

Whatever follows in terms of economic decisions is not saving. It is something entirely different.

Saving is a MEASURE of income – specifically, a measure of a defined subset of income.

In your defined economy, at the individual level, it is the measure of what is left of income following whatever portion is spent on consumption.

You can’t use a MEASURE to “do” something else. It is what it is.

So, individual saving is the act of not spending income on newly-produced consumption goods.

Saving is NOT the act of doing something beyond that. The act of saving is entirely separate from anything that follows saving.

Furthermore, before you identity what “happens” by way of economic decision next after saving, you must identity the additional, AUTOMATIC CONSEQUENCES of saving in ALL cases. In a monetary economy, that depends on your assumed monetary infrastructure. (My personal view is that it would be hopeless to attempt any useful exercise in monetary economics without this step, but I’m not a monetary economist. And I gather that’s not what you guys think, particularly those who delight in solving monetary problems by avoiding references to banks.)

To make things simple, at this step anyway, I usually think of the monetary infrastructure as a banking system without any additional forms of financial intermediation.

So the automatic consequence for an individual who saves is that his bank deposit account increases by the amount of saving.

(And if you want to assume for some reason that the money supply can’t increase at the macro level, that is simply a non-starter unless you assume further forms of financial intermediation or that aggregate saving is zero or that old loans are paid down. It is relatively easy to deal with all sorts of permutations in this area, using accounting, but for the purpose here, just assume that banks can perform a lending function to generate new money as required in order to create the necessary initial accounting match of a financial stock (bank deposit) to an economic flow (saving) at the micro and/or macro level.)

The next question is what does the individual do by way of further action to change the level of that bank account. THIS HAS NOTHING FURTHER TO DO WITH SAVING. SAVING IS DONE. FINI.

So the individual has a bank account from which he can decide to invest, hoard, or buy antiques A.

At this point, we are not finished with the accounting at all, Nick, which is the problem here.

What we’ve seen so far is income accounting.

What we’re about to get into is either additional income accounting, or flow of funds accounting that has no effect on income accounting whatsoever.

In the case of either investing in I, or hoarding, resolution of income accounting is required as a next step. Whatever happens at the micro level, and with the help of some standard Keynesian type macro thinking and accounting, the numbers must simply add up at the macro level such that C + I = C + S. Such an accounting outcome is assured one way or another. How you get there is a matter of both economics and corresponding accounting iteration. But the reconciliation gets done. And with the case of hoarding, recession risk obviously comes into play.

In the case of antique buying, you get into flow of funds accounting. There is no income accounting involved in this whatsoever.

Antique buying is an asset swap that has nothing to do with income.

So that’s the accounting framework from which to start the analysis of monetary and real economic effects.

And you can do all your required monetary analysis using that framework.

And Nick, your monetary analysis is no doubt perfect, but you can’t do it properly without starting from the proper definition of saving – a definition that has absolutely nothing to do with antiques.

And I have to say that I see nothing terribly complicated about inserting flow of funds scenarios like potential or actual antique buying into the mix and determining what that means for money hoarding stages and possible further decisions that do or don’t have further consumption and measured saving effects. That sort of analysis is not impeded at all by proper accounting.

BTW, my version of “the bit that people may miss” is that it is essential to understand that saving can be negative at the individual level. And it can be negative at the level of all individuals in a given economy. And it can be negative in any sector in that economy – private or public. And it can be negative in a country. But it can’t be negative for the world.

Corollary: the fact that you can’t “use” negative saving to buy antiques is a specific case of the fact that you can’t “use” saving, positive or negative, to buy anything. That’s not what saving is or does.

Finally:

“Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income.”

It’s not a non-thing. It’s a measure of a subset of income. And it is a residual in that sense, but so is the world except for Nick. And that’s no small thing.

[reason]

To be perfectly honest Nick, I think you have argued yourself into a hole. You have just proved that we can in fact ignore A and concentrate only on C and I and S. A makes no difference - its a red herring.

But yes M does make a difference - but we already knew that didn't we? Find me a modern Keynesian who thinks otherwise.

[reason]

Actually I take that back, A could matter - if it was exported or imported! But the foreign sector wasn't part of your model - was it?

[Ritwik]

Nick,

So long as you're at it, how do individuals/corporates actually hoard money? Apart from the actual cash in the wallet (which can easily be assumed to be constant), all cash or money is short term liabilities of the banking system. To that extent, whether this saving is hoarded or invested is a function of

1) Investment/ credit demand.
2) Risk-bearing capacity of the banking/financial system.
3) Regulatory ratios imposed by the central bank.

What 'choice' does the individual saver have in this?

[Nick Rowe]

Wow! Lots of comments.

Let me first do one general response:

There are lots of different ways we can divide up the world into categories see Borges on "animals" http://en.wikipedia.org/wiki/Celestial_Emporium_of_Benevolent_Knowledge%27s_Taxonomy

Which would be the most useful way to divide up income, and define saving?

Which of these 3 definitions of desired saving is the most useful?:

S0: Sd=Y-Cd (Standard)

S1: Sd=Y-Cd-Id (All income from the sale of newly-produced goods minus demand for all newly-produced goods.)

S2: Sd=Y-Cd-Id-deltaAd (All income from the sale of newly-produced goods minus demand for all goods)

The answer depends on the economic theory we have. I would say that S2 is the most useful. But I can see some Keynesians consistently argue that S1 is the most useful (I think some MMTers do this, in effect?)

[Noah Smith]

Great post!

I think this functions well as a reply to Scott Sumner's recent post:
http://www.themoneyillusion.com/?p=12596

[Nick Rowe]

Notice also that the recent debate about the burden of the debt was also an example of the "Borges Problem". Do we divide the future up into time periods or into cohorts? We get very different results depending on how we categorise the world. And sometimes the categories we use are chosen by someone long ago who had a totally different purpose and/or a totally different theory to ours. Our way of seeing the world gets distorted by the dead hand of historical ways of seeing.

[Phil Koop]

@Noah Smith: maybe, but David Glasner's reply is better: uneasymoney.com/2012/01/11/scott-sumner-goes-too-far/.

[Nick Rowe]

Noah: Thanks! Yep, I wrote it after reading Scott's post and all the comments on that post. The underlying problem is that the Keynesian version of the Celestial Emporium of Benevolent Knowledge just doesn't fit with Scott's way of viewing the world. (No doubt vice versa too).

[Nick Rowe]

Phil: I left this comment on David's blog:

David: “Income and expenditure are not identically equal to each other; they are equal in equilibrium.”

No. Actual income and actual expenditure are identically equal to each other.

“One way to see this is to recognize that there is a lag between income and expenditure.”

If you mean that an individual’s desired expenditure depends on his lagged income, that is a behavioural assumption that may or may not be true. I would say it depends both on his lagged and on his expected future income.

[Kevin Donoghue]

"Actual income and actual expenditure are identically equal to each other."

Nick, that's a bit like saying that 2+2 and 4 are identically equal to each other. An identity, as I have always used the term, is an equation such as x(y+1)=xy+x. Is there a good reason for departing from such terminology? Scott Sumner is creating a dreadful muddle I think. But what the hell, it's your profession. Make what you will of it.

[Max]

"3. Money. Demand for newly-produced consumption goods falls and demand for a flow of more money increases by an equal amount. Each individual wants his stock of money to be increasing over time."

People need money to pay their debts. So an increase in the demand for money doesn't need to involve wanting to increase a stock of money, but rather a credit squeeze.

[Nick Rowe]

Kevin: "Nick, that's a bit like saying that 2+2 and 4 are identically equal to each other. An identity, as I have always used the term, is an equation such as x(y+1)=xy+x."

No. In this case, since I haven't given a number for either of Y, C, or I, when I say that Y=C+I is an identity that is exactly like saying x(y+1)=xy+x is an identity. My preferred example is: the number of anyone's sons + the number of his daughters = the number of his children. That's an identity. I haven't said who he is, or how many sons or daughters he has.

[Nick Rowe]

Max: "So an increase in the demand for money doesn't need to involve wanting to increase a stock of money,..."

Yes it does. By definition.

[Lee Kelly]

Income equals consumption in the long run. Therefore, saving is really just deferred consumption. Would you be happier if we just called it 'deferred consumption' (while dissaving could be 'advanced consumption')?

[mr miyagi]

Nick,

Just wanted to say that in the S and I haze that has befallen the econo-blogosphere, you have brought clarity to at least one person.

Thanks and keep up the great work for econ autodidacts like myself.

[Scott Sumner]

Noah Smith, You said;

"I think this functions well as a reply to Scott Sumner's recent post:"

I think Nick and I see this the same way, unless I'm missing something.

[marris]

JKH, your post is nonsense. Are you really *criticizing* the model for not having banks? Models *with* banking are very important, but Nick is trying to illustrate an important point here. Do not just say what *doesn't* happen to your income. Let's enumerate the things that *could* happen and see the consequences of each.

If your going to be combining stocks and flows, then your going to need some PERIOD(s) in your analysis. Only then can we make statements about how the stock at some point P at the START of the period relates to the stock at P at the END of the period. [It is possible to avoid periods entirely and just analyze a flow diagram, but you can only study rates this way. You can't study stocks.]

When Nick says "an individual's savings means...," he means the *change in an individual's savings over a period* is the portion of P's income (his in-flow) which he did not spend on consumption goods (one particular kind of out-flow). That's it. No more, no less. For this model, we don't care whether he used a bank, used his mattress, wired money around telepathically, etc. "Savings for the period" has been defined.

Now Nick's further goal is to DECOMPOSE the saved amount. We know income flowed in, and *some* consumption money may have flowed out. Where's the rest? Nick lists three possibilities. The money could have flowed out for NON-CONSUMPTION goods (in this case, either I or A). Or, it could have STAYED with P (increased his cash balance). Nick's point is that there is a lot of confusion that arises in macro discussions simply because various sides don't specify what particular decomposition is being discussed. So why not avoid the confusion? Say WHERE you think the money went, and the other side can evaluate your points with this in mind.

What is descibed above *is* a measure.

Not sure why you think antique buying does not involve "income accounting." The purchase money is part of the antique seller's income for the period. There is nothing magical about antiques. Before the period, the antique holder's balance sheet showed the antique as an asset. Now it shows cash as an asset [provided the holder did not spend the sale money on something else.] He must decide what to do with income just like everyone else. If he wants, he can even *buy back* some antiques. You can still have entrepreneurship in this model, where antique speculators try to forecast future antique demand.

[StatsGuy]

Thank you. Helpful.

Of course, the textbooks are written, so maybe you need intermediate terms. Perhaps just leave it as "national saving" and "individual saving". Or perhaps just call it non-consumption.

Then you can say

production = consumption + non-consumption

And who can disagree with that? At least it clarifies what Keynesian's mean. Then at the national level we can have an argument about what "non-consumption" means.

If, in Steinbeck's grapes of wrath, we dump truckloads of produce into the ocean to avoid depressing the price, is that consumption or investment? :)

[erik]

More importantly, the term "money" should be abolished.

Are not people consuming and investing eunough?
Well - then we shold have a lower interest rate (which will decrease the rate of return on all financial savings such as bonds, stocks, money etc.).
You say what? The US happen to control the interest rate through money aggregates (unlike many other central banks who simply set the interest rate directly)? So? Why does it matter wheter they puch a button or is pulling a lever? The point is that the FED is controling the interest rate. "Money" is a red herring.

[Lee Kelly]

There are two kinds of income, nominal and real. I cannot spend my nominal income on money, but I can spend my real income on money. To increase my money balances by $50, I must refrain from spending $50 of my nominal income, but I must also spend $50 of my real income. This difference is what makes money special. To acquire anything but money, I must spend both my nominal and real income on whatever that thing is, but with money I only spend my real income.

The problem is that if, on average, people try to spend more of their real income on money, they must refrain from spending as much of their nominal income. In the short run, falls in nominal income cause falls in real income, since prices do not adjust immediately. Therefore, we get a recession. None of this is true for anything but money.

[Nick Rowe]

Lee: "Would you be happier if we just called it 'deferred consumption' (while dissaving could be 'advanced consumption')?"

That might be a good idea. I can't make my mind up. But don't we still need to ask: "OK, and what asset are you planning to hold in the meantime?"?

Dunno.

Scott: "I think Nick and I see this the same way, unless I'm missing something."

I don't see any obvious big differences. But I do have to "read between the lines" a little, on whether you are talking actual or desired. The difference is that I am a lot more comfortable switching into a Keynesian worldview than Scott. It's a much more familiar landscape for me.

(And I agree with your point that "saving" may be a useful concept in a long run growth model, where we can ignore money and recessions, and so these problems don't arise. Hang on, but even then we might want to look at questions like "saving" in the form of land, or antiques, as in the so-called "Junker Fallacy"?)

[rjw]

The problem here - as perfectly exemplified by the above discussion - is that "saving" has several meanings, and that it takes a day or two of conceptual clarification before we can be entirely clear what each person has in mind when they use the term. This is true even among fairly economically literate people. In particular:

- sometimes "saving" is used to refer to individual decisions, at other times to macro aggregates

- sometimes it refers to real capital and at other times to financial assets

- sometimes it refers to macro flows, sometimes to asset stocks

- sometimes it is treated as a residual, at other times having causal significance

To add fuel to the fire, different theoretical perspectives often offer radically different views on the links between macro and micro, how the real and monetary are linked, and consequently causality. And this in turn often swings on whether you start with an economy at full employment, or one with underemployed resources.

The result is a total conceptual mess. The concept of "savings" lies at the intersection of all those things that make economics tricky. We could not have chosen an analytical category more prone to cause confusion if we had tried. I'm all for getting the concept out of economics, and instead focussing on consumption and investment, where the scope for confusion, while far from zero, is rather less.

[Nick Rowe]

Statsguy: "If, in Steinbeck's grapes of wrath, we dump truckloads of produce into the ocean to avoid depressing the price, is that consumption or investment? :)"

Damn! Hard question. Is it consumption, investment, saving, or neither??

It is exactly when you face weird questions like that that you see that the definitions we use and the Celestial Emporium of Benevolent Knowledge categories we use may make sense in one context but be useless in another. And it's better to start from scratch and just build a model in which grapes get dumped into the ocean and make up whatever definitions and categories that fit that example most usefully.

mr miyagi: thanks! Makes it all worthwhile.

erik: if you abolish "money", then are you talking about a barter model? Because that model would be very very different from the quasi-Keynesian model I have sketched above.

[Kevin Donoghue]

"In this case, since I haven't given a number for either of Y, C, or I, when I say that Y=C+I is an identity that is exactly like saying x(y+1)=xy+x is an identity."

Sure, but I can't see what makes you think David Glasner disputes that. The confusion arises because there are apparently people out there who think that Y(N,K)=C(Y)+I(r) is an identity.

[Steve Roth]

Damn this is sounding remarkably familiar. ;-)

Put more simply, perhaps:

On the macro level, the proportion of individual saving to spending has no impact on the quantity of net financial assets. Because savings is simply not spending. And spending just transfers financial assets from one person's/business's account to another. Net zero.

The stock of financial assets can only increase or decrease via government deficit surplus, or net imports/exports. MMT World.

This also means that the stock of "loanable funds" is unaffected by the individual spending/saving proportion.

It seems to me that there's another big source of confusion (simplifying here): real goods can be consumed (both C and I; they're both consumed eventually), so there's a linear flow/"supply" of them. Financial assets cannot be consumed. There's no linear supply; only circuits. Which makes the "demand" for financial assets a very different concept, one in which I, at least, find S/D diagrams very problematic as explanatory models.

[Nick Rowe]

marris: "To be pedantic in the analysis of (3): Once we look at the scenario where money stock is increased, do we need to go back and ask whether the C market will clear at the new, lower demand?"

Yep. I was implicitly assuming sticky prices for C and I. Should have made that explicit. (But I did say it was Keynesian macro, so I think it's understood.)

Bob: "Nick do we need to abolish the concept of "hunger"? I mean, you know it means I want to eat, but what? Burgers? Antique chairs? It's so imprecise."

If what we wanted to eat made a big difference to whether or not it would solve hunger at the macro level, we would need to be more precise. For example, suppose the aggregate supply of apples is perfectly inelastic and the aggregate supply of bananas perfectly elastic. Either would solve an individual's hunger but only bananas would solve world hunger.

[Nick Rowe]

spam filter is playing up again. so if your post doesn't appear, that's probably why. i just rescued 2.

[Greg Ransom]

What to you call it when someone choses to switch the use of short term production good which produces an inferior output into a longer production process that produces superior output?

Your immediate consumption ISN'T REDUCE ONE BIT .. what changes is your ability to consume and invest in the future ...

Just one more Keynesian / macroeconomic fallacy put on the table .. when can we address these?

We can expand our savings by changing the consumption and investment patterns in the future, without changing them in the present.

Maybe Robert Murphy can make us an Excel spread sheet. Economists seem to need them.

Nick writes,

"Saving isn't a thing, it's a non-thing. It's a residual. It's defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption."

[Bill Woolsey]

With Rothbardian "macro" accumulationg money balances is different from saving. Income can be used for buying consumer goods, buying assets (or paying down debts, I guess,) or accumulating money.

The interest rate has to do with saving and investment. The purchasing power of money/price level has to do with the supply and demand for money.

In my view, money is an asset too (and generally a financial asset) and so accumulating it is saving.

You are correct that saving isn't a thing, but rather a difference, but saving implies an increase in net worth. You must accumulate assets or reduce debts. Most of these things impact financial markets in ways that pretty directly impact prices and yields (though maybe not antiques.) Accumulating money balances, or paying off debts in a way that reduces the quantity of money don't have that effect and that is a source of difficulty.

To me, this is just the right way to look at the world.

It is true that it doesn't highly monetary disequilibrium as well as the Rothbardian approach where money is in its own category.

[paine]

my god nick i agree with your head line one thousand percent

savings is a calvinist household virtue

not a macro economic category

[Cy]

Statsguy: "If, in Steinbeck's grapes of wrath, we dump truckloads of produce into the ocean to avoid depressing the price, is that consumption or investment? :)"

That's not *anything* from a GDP accounting perspective, right? It's not changing GDP, it's not traded, GDP accounting is totally blind to it. In a direct sense, if you bought those grapes from someone else, then it counts as consumption. If you grew them and destroyed/consumed them yourself, that doesn't get counted in GDP at all.

The idea that "savings" in the normal human sense of accumulating wealth doesn't actually have much to do with S in the GDP accounting identity is the key point here, to me at least. If I take my income and put it under the bed, that decision just never shows up as the GDP accounting version of Savings. It's not adding to GDP at all, why *would* it show up there?

[Greg Ransom]

Two typos fixed:

What do you call it when someone choses to switch the use of short term production good which produces an inferior output into a longer production process that produces superior output?

Your immediate consumption ISN'T REDUCED ONE BIT .. what changes is your ability to consume and invest in the future ...

[paine]

"Why this Keynesian fetish for the new"

the social opportunity cost of non production
is very much greater then non exchange

more or less stuff is at stake
not just its distribution

[wh10]

"It seems to me that there's another big source of confusion (simplifying here): real goods can be consumed (both C and I; they're both consumed eventually), so there's a linear flow/"supply" of them. Financial assets cannot be consumed. There's no linear supply; only circuits. Which makes the "demand" for financial assets a very different concept, one in which I, at least, find S/D diagrams very problematic as explanatory models."

I'd be curious to here Nick's response here. This might (or might not) be expressing what I am trying to saying about the interest rate on govt debt, that combined with the fact that only the govt can change the net amount of financial assets. Our past convos (and with vimothy) sort of dead end here, where Nick says most economists believe in the S/D loanable funds model for govt liabilities (and the natural rate, etc).

[vimothy]

Nick, I object strenuously to your headline. We can't abolish "saving"--it's one of my favourite subjects to sit and ponder over. And if I have nothing to ponder over, what excuse do I have for drinking this glass of whiskey? I vote that we keep "saving"--that way, you get to write more blogs about it, everyone else gets to read 'em, and I get another dram of Laphroaig.

When I think of saving, I think of an individual not spending his income, or equivalently a country adding to its stock of (human/nonhuman/tangible/intangible) capital. Basically, delta "net wealth" > 0 in either case.

[Nick Rowe]

rjw: "We could not have chosen an analytical category more prone to cause confusion if we had tried. I'm all for getting the concept out of economics, and instead focussing on consumption and investment, where the scope for confusion, while far from zero, is rather less."

Yep! And then, just like in micro, we can distinguish three concepts:

1. Qd. Quantity of apples demanded (desired/planned/ex ante purchases by buyers)

2. Qs. Quantity of apples supplied (desired/planned/ex ante sales by sellers)

3. Q. Actual quantity traded/bought-and-sold/transacted.

Add that Q = min{Qd.Qs} in "semi-equilibrium" of keynesian macro.

Add that Q=Qd=Qs in full market-clearing equilibrium.

And money, the medium of exchange, is then the only good that is weird, because it doesn't have a market of its own.

[Nick Rowe]

Bill: "You are correct that saving isn't a thing, but rather a difference, but saving implies an increase in net worth. You must accumulate assets or reduce debts. Most of these things impact financial markets in ways that pretty directly impact prices and yields (though maybe not antiques.) Accumulating money balances, or paying off debts in a way that reduces the quantity of money don't have that effect and that is a source of difficulty."

Let's focus on that "(though maybe not antiques.)" bit.

Most macroeconomists have a model in mind where the good that is neither money nor newly-produced is called "bonds". My model here calls it "antique furniture" instead. That's a metaphor for old houses, cars, land, etc., etc.. Which is most important empirically? It's not obvious. Bonds net to zero (except for unborn generations ;-) ). But even if we look at gross bonds, antique furniture is usually bigger than bonds. The average house is worth roughly 3 times annual income of the family living in it.

[erik]

Nick: I did not mean that "money" should be abolished from the actual economy, just as a analytical concept in economics (Like you obviously did not mean that actual savings should be abolished - whatever that would mean).

If you e.g. want to lower interest rates or the rate of return on personal savings - say so instead of demanding "lose monetary policy".

[Nick Rowe]

Steve Roth: "Damn this is sounding remarkably familiar. ;-)"

Actually, I think it has more in common with some of your old posts, and our old discussions, than with MMT.

"The stock of [net NR] financial assets can only increase or decrease via government deficit surplus, or net imports/exports. MMT World."

That's not (just) the MMT world. That same identity crops up in one form or another in every model that has financial assets.

[Greg Ransom]

Consider 3 periods and 3 alternative scenarios. You have just spent money on diesel oil, some land, corn kernels & some pine cones. You are indifferent between eating corn kernels and pine nuts.

(1) The first scenario is the unchanging scenario, a savings scenario, the one like the pattern of the past.

You use the corn kernels to plant the land with corn and harvest and eat it later in the season, and you use the diesel oil in the process. You eat the pine nuts now.

(2) in the second scenario is the consumption scenario, you immediately eat the corn kernels, you pour the diesel oil on the land and have a big slip and slide party leaving the land indefinitely unusable, and you let the kids boil the pine cones in a pots pretending to make soup.

(3) is another savings scenario, an alternative savings scenario. In this 3rd scenario you plant the pine nuts onto the land, which you harvest decades from now and use to build log houses, using up your diesel oil in the process. You eat your corn kernels now.

Assume all of these processes require the same labor.

In both 1 and 3 you save exactly the same dollar spent. In scenario 2 you consume those dollars rather than save.

But note well, in scenario (2) you will have much more to consumer in 6 months compared to period (3) when the corn is ready, and must less to consume and decades from now when the houses are ready.

If you are taking a backwards looking / dollar input perspective on "savings" as macroeconomists do, using the backwards looking value theory handed to them by Ricardo and Keynes, you miss the differences savings the differences in choices between scenario (1) and (3) represent -- macroeconomists simply put value from the past accounted in dollars into Ricardo/Keynes value theory machine and extrude it out in a linear fashion at a later point in the future.

It's as if the revolution in value theory of Menger, Jevons and Walras had never happened ...

[JP Koning]

Nick, I agree with you that the conversation on debt was mainly about categorizations and the lack of standardized terms associated with categorizations. That made it very frustrating to follow.

So I am all in favor of standardizing terms, as you advocate in this post.

I noticed you originally introduced C and I as flows and A and M as stocks. Then when you brought in the individual's economy, you introduced not a stock of antique furniture, but a flow of antiques, and not a stock of money, but a flow of money. Presumably you did this to preserve stock flow consistency.

The idea of a flow of antiques or money is very unintuitive to me. Why not go the other way? Not flows of consumption and investment, but stocks? Thus you have and individual's goods C, I, A, and M, which are all stocks. Sum them all up and you have S (the noun form of S, not the verb). This S can rise or fall. As a solution to the Borgian categorization problem, this configuration makes more intuitive sense to me.

[Bill Woolsey]

Nick:

OK, but new houses are close substitutes for old houses.

New cars are close substitutes for used cars.

Now, there are some "used cars" that are in great shape and 50 or 100 years old. New cars aren't good substitutes for the antiques.

Heck, here in Charleston I am sure there are people whose heart is set on living in a historic single house downtown--or perhaps having one of the mansions along the battery. Can't make more of those.

But how big are those specialty markets?

(Or maybe I didn't get your point. Are we back to discussing who monetary disquilibrium can interfere with people moving between houses?)

[Ken]

Extremely helpful, Nick. Thanks!

[Ritwik]

Nick,

Since my comment got lost in all this (frankly, quite trivial) Wittgensteinian angst, I will just repeat it.

People who want to hoard money hoard it by adding to the short term liabilities (and cash) of the banking system.

But this does not ensure that the money is hoarded. The bank also has to want to hoard it (to the extent that banks have desires). Or to fail to find interested borrowers.

So there are 3 variables beyond the increased money demand at work. The risk appetite of the bank, the demand for borrowing and the regulatory capital ratios.

So, isn't it more correct to say that a recession is caused by inadequate credit demand or failure of intermediation rather than an increase in money demand (to the extent that all monetary economists seem to use 'cause' and 'last link in a long chain' almost interchangeably) ?

[Nick Rowe]

JP, but if we think of income as a flow, then thinking of C and I as stocks is going to create problems. We are going to need either a delta or an integral somewhere. I don't have a problem in thinking about my annual net acquisitions of antiques!

Bill: "(Or maybe I didn't get your point. Are we back to discussing who monetary disquilibrium can interfere with people moving between houses?)"

I wasn't back on that moving between houses point. I deliberately ruled that out by assuming no trade in antiques in equilibrium.

Will think more on your point.

Ritwik: "So, isn't it more correct to say that a recession is caused by inadequate credit demand or failure of intermediation rather than an increase in money demand (to the extent that all monetary economists seem to use 'cause' and 'last link in a long chain' almost interchangeably) ?"

I would say no. Replace my "antiques" with "bonds" or "IOUs". Assume the price of bonds is fixed by law (like a usury law of some kind that prevents the bond market clearing). It's exactly the same model, except we have changed the name of one of the goods.

Adding banks, and/or a central bank to the model will matter to the extent that they change the quantity of money supplied in response to changes in money demand, and in response to other things.

[Frances Woolley]

Nick - just to say how much I enjoyed this post, also the last one. This distinction between the different forms of non-consumption is crucial to understanding the impacts of population aging on economic growth - which was perhaps one of the things at the back of your mind when you wrote it?

[erik]

Nick: "Assume the price of bonds is fixed by law"
Well - it is not. So Ritwik is absolutely right.

It is just confusing to talk about "money". Money is just one financial asset among many. The FED do not care one bit about monetary aggregates except as a instrument to control what they do care about - interest rates.

The FED control inflation throug interest rates - not monetary aggregates.
The amount investors can borrow at some interest rate depend on resourse utilization and consumption - not monetary aggregates, which are flexible, and which the FED do not care about. Crowding out happens through changes in inerest rates which is determined by increased resourse utilization and/or consumption, not by a lot of people competing for some fixed credit stock. etc.

[Steve Roth]

"Actually, I think it has more in common with some of your old posts, and our old discussions, than with MMT."

Right, that's what I was referring to. I'm the reason "saving" should be abolished.

On MMT, I also run into problems trying to grasp their attempts to explain themselves in NIPA terms -- notably when S meets (or doesn't meet) I.

But as I've pointed out, in his seminal "stock-flow-consistent accounting" paper Godley (not formally an MMTer, the term arose after his time, but...) *has* abolished "saving." Doesn't need it. I heartily approve.

I've had another think piece brewing, your post here may have given me the courage to post it.

[JP Koning]

"but if we think of income as a flow, then thinking of C and I as stocks is going to create problems."

You start out with the C and I that you have produced in your stock of assets, hold this C and I until you find someone who'll exchange for them with the M they have in their stock of assets. Now they are holding C and I and you are holding M. So here income isn't a flow, it's just a trade, an instantaneous swap of assets held in a portfolio.

How much of economics is taken up by definitional debates and confusion? You'd think there would be a universal set of definitions for economic terms somewhere so these issues don't pop up. When I read William Hutt's books I'm always pleased because he uses his first chapter to explicitly define every term he'll be using.

[Steve Roth]

Okay, not ready to post that think piece yet.

Nick:

"demand for a flow of antique furniture increases by an equal amount. What happens? This one's a bit tricky."

Tricky indeed. Asuming the stock of antiques is fixed, isn't the "flow" of antique furniture utterly different from the flow of consumption or investment goods? There's a fixed stock, circulating, not a linear production-->consumption flow. Maybe it's not even right to call it a flow.

Does it make sense to talk about the antiques market in the same "flow" terms as the C market? (Or I, for that matter -- investment goods get consumed too, of course, just more slowly; it's all consumption spending in the long run.)

Do "supply" and "demand" have the same meanings (or interacting dynamics) in a market with no production-->consumption flow, in aggregate, no "supply" and no consumption either individual or aggregate? I really question whether they do, though I'm hard-pressed to support that statement rigorously.

JP Koning: "How much of economics is taken up by definitional debates and confusion? You'd think there would be a universal set of definitions for economic terms somewhere so these issues don't pop up. "

Thank you very goddamn much. I'd like to see fifty economists each write a definition of "supply" and throw them all into a hat. Pull them out one at a time and read them. I think they'd vary wildly and embarrassingly. And that's before we get to layfolks, talking about "investment" and such...

[Steve Roth]

Vimothy:

"When I think of saving, I think of an individual not spending his income, or equivalently a country adding to its stock of (human/nonhuman/tangible/intangible) capital."

Zactly right. My confusion: What's the relationship between the first and the second?

[Nick Rowe]

Supply and demand, stocks and flows.

Let's think in stock terms first. Put the stock of antiques on the horizontal axis, and the price of antiques on the vertical. Draw a vertical supply curve to represent the fixed existing stock, which is all owned by somebody. Draw a downward-sloping demand curve, to represent the desired stock of antiques as a function of the price. The lower the price, the greater the stock of antiques I would like to own.

If everybody is identical, there will never be any actual trade in antiques. At the equilibrium price P*, the desired stock will equal the desired stock, both for each individual and in aggregate. At a price above P*, the desired stock will be less than the actual stock held, and everyone will want to sell some.

Now randomly take some antiques away from some people and give them to others. At P*, some individuals will have excess stock demand, and others will have excess stocks supply. Now we get trade.

Will those trades all take place in an instant, with some buying and some selling a stock of antiques? Or will those trades happen slowly over time, as people buy or sell a flow of antiques, and slowly get back to their long run desired stocks? That depends. If antiques are a small part of your wealth, and the market is frictionless with all antiques identical and so zero search costs (obviously not, for antiques). Each person would instantly buy or sell a stock of antiques to get back to his personal desired stock. Otherwise, there will be a flow of trades. If antiques are a large fraction of your wealth, you may only buy and sell slowly, in a flow.

Now think in flow terms. The price is on the vertical axis as before. But the horizontal axis is now the flow of net acquisitions of antiques, so you need to extend the horizontal axis in both positive and negative directions. Draw a vertical net flow supply curve at zero (they aren't making any more). Draw a downward-sloping net flow demand curve which cuts the supply curve at P*.

If P=P*, there's no trade (assuming everyone is identical). At P below P*, everyone wants to be buying a flow of antiques, (2 chairs per month). At P above P*, everyone wants to be selling a flow of antiques. If people are not identical, and some have a growing stock demand for antiques, and others a falling stock demand for antiques, there will be trade even if the net flow demand is zero and the price is at P*.

[Nick Rowe]

Steve: "My confusion: What's the relationship between the first and the second?"

For the individual, there is no relation.

For all individuals together (assuming nor foreigners and no government) they are the same thing. If one individual saves by buying antiques, another individual must be dissaving by selling antiques. The only way they can all save is if more saveable assets get produced (investment).

[Nick Rowe]

The above uses the standard definition of "saving": ie not spending on *consumption*. If instead we define saving as "not spending", there is no relation between the first and second, either at the individual or the aggregate level.

[Nick Rowe]

Net flows and gross flows, demand and supply:

If everyone is identical, there will be no trade in antiques. Both net and gross flows of trade will be zero. If people are different, there will be gross trades but no net acquisitions.

If everyone is identical, will they trade in C+I? No. If everyone produces exactly the same good, and all have exactly the same preferences and technology, there are no gains from trade, so everybody is self-sufficient. You just produce your own C+I. That's why I stuck in that assumption about it being tabu to grow your own C+I. In the real world, of course, there are lots of different varieties of C+I, and so we specialise and trade.

[Steve Roth]

"extend the horizontal axis in both positive and negative directions"

Aha.

[Nick Rowe]

Steve: Yep. The other way to do it is to separate the buyers and sellers into two groups. If everyone is identical, the supply and demand curves meet at zero, on the vertical axis. So the supply and demand curves don't look like an X. They look like a V, on it's side, with the point of the V on the vertical axis.

[Steve Roth]

Nick: "The only way they can all save is if more saveable assets get produced (investment)."

Right. I understand that's how the NIPAs present things. The stock of "national savings" consists of unconsumed long-term real assets -- drill presses, houses, and such that can be consumed through use (and time/natural decay) in the future. That makes sense in one sense. As Kuznets said, that is the true wealth of the nation.

But here's where I get lost: how does buying/creating drill presses increase the quantity of "loanable funds"?

Wiki on loanable funds: "Savers supply the loanable funds; for instance, buying bonds will transfer their money to the institution issuing the bond..."

1. Are "savers" here investors in fixed assets, or non-spenders? (They can't be both, because investing is spending.)

2. No: buying a bond truly *is* a barter transaction -- a bond goes one way, and a checking-account deposit goes the other (with all the mechanics of bank-reserve intermediation/offsets). No increase in "loanable funds."

??

In the NIPA conceptual construct, national "savings" are stored in fixed assets. How does that increased stock of "savings"/assets come to be embodied in an increased stock of net financial assets -- which if MMT has it right (which I think they do), can only be increased via government deficit spending (or a trade surplus)?

[JP Koning]

"Will those trades all take place in an instant, with some buying and some selling a stock of antiques? Or will those trades happen slowly over time, as people buy or sell a flow of antiques, and slowly get back to their long run desired stocks? That depends. If antiques are a small part of your wealth, and the market is frictionless with all antiques identical and so zero search costs (obviously not, for antiques). Each person would instantly buy or sell a stock of antiques to get back to his personal desired stock. Otherwise, there will be a flow of trades. If antiques are a large fraction of your wealth, you may only buy and sell slowly, in a flow."

Ok, thinking in a world with stocks, (an infinite series of balance sheets), trades still happen in an instant, even if you introduce search costs. You hold the antique on your balance sheet until you don't. The antique is in your hand up until the moment it enters the hand of the buyer.

Introducing frictions means that someone can have the intention of selling that antique and will need to incur costs to search out someone to trade. But it doesn't mean the process must be a conceptualized as a flow. Rather, the intention of selling an antique just moves the antique to a different part of an individual's balance sheet. It continues to lie in the asset column of their balance sheet, but is moved from long-term assets to current or liquid assets. Introducing search costs means that instead of an interval of two balance sheets before a swap occurring, the interval is some number larger than two.

[Nick Rowe]

Steve: lovely questions. Let me try. I may come back to this later.

First, notice that in my model there is both saving and investment, but there is nothing whatsoever that looks at all like "loanable funds"! Money (in my simple model) is never lent. And antiques aren't investment, because there's a fixed stock. The people buy the investment goods directly. If we wanted to we could say that people lend themselves the funds to buy investment goods. But why would we want to do that?

How would we change my model so that it would make sense to talk about "loanable funds"? Maybe introduce "firms" and assume that all investment is purchased by firms, and assume that firms never retain earnings, but have to borrow from people to finance their investment. Which means we have a fourth good, called "bonds" (or "shares" if there's uncertainty) that are IOUs from firms to households. If we make the additional assumption that firms never hold stocks of money, then we can say that the flow of new IOUs sold by firms to people will equal the quantity of investment. The market for those IOUs is the market for loanable funds.

The truth is somewhere in between that model and my original one, and far more complicated than either. Firms hold money, there are consumption loans too, etc.

[Greg Ransom]

I is necessary heterogenous in any world relevant to our own.

I can be expanded or contracted by choosing between alternative production processes which transform consumption and output patterns in the future, but NOT IN THE PRESENT. In other words, I can be larger or smaller in value terms depending on what sacrifices we want to make in the near term in order to reap greater value in the longer period.

I is NOT fixed, its value depends on our choices and the uses of make of things.

S is a FIXED measure, a fixed stock, measure IN THE PAST.

Therefore, S does NOT equal I. And S does NOT determine I.

QED

[JP Koning]

I posted this a while ago but it got gobbled. Here is my best attempt to remember it.

"Will those trades all take place in an instant, with some buying and some selling a stock of antiques? Or will those trades happen slowly over time, as people buy or sell a flow of antiques, and slowly get back to their long run desired stocks? That depends. If antiques are a small part of your wealth, and the market is frictionless with all antiques identical and so zero search costs (obviously not, for antiques). Each person would instantly buy or sell a stock of antiques to get back to his personal desired stock. Otherwise, there will be a flow of trades. If antiques are a large fraction of your wealth, you may only buy and sell slowly, in a flow."

In a stock world (a world of infinite balance sheets), introducing search costs needn't mean that trades occur as a flow. Search costs or not, an antique is held on your balance sheet until it isn't. It's in your hand until the moment when it enters the hand of the person you are trading with.

Search costs mean that people can have the *intention* of selling something but still hold it on their balance sheet. Instead of thinking of this as a flow, it can be conceptualized as a shift along a balance sheet. The asset gets transferred from the long term assets section of the assets column of an individual's balance sheet to the liquid or current assets section of their assets column. Instead of a desired swap occurring after an interval of two balance sheets, it takes more than two balance sheets before consummation. But in the end it is still an instantaneous swap of stocks.

[Steve Roth]

Greg Ransom: My intuition tells me that what you're saying would help me understand. But I don't understand it (or only dimly) as you present it. Are there readings that have provided Ahas for you in developing this thinking, which might be useful to me in understanding it?

[Steve Roth]

JP Koning: I think what Nick's saying is that in aggregate, if there are search frictions all the transactions will look like a flow, even though every transaction is necessarily instantaneous.

[Nick Rowe]

Greg: "S is a FIXED measure, a fixed stock, measure IN THE PAST."

If that's what you mean by "S", you are using it to mean something different from other macroeconomists, for whom S is a flow. That's OK.

[Greg Ransom]

Read Bohm-Bawerk, Capital and Interest:

http://www.econlib.org/library/BohmBawerk/bbCI.html

Or Hayek, Prices and Production:

http://mises.org/resources/681

Or Hayek, The Pure Theory of Capital:

http://mises.org/resources/3032

or Ingo Pellengahr, The Austrian Subjective Theory of Interest:

http://books.google.com/books/about/The_Austrian_Subjectivist_Theory_of_Inte.html?id=QgDoPgAACAAJ

Greg Ransom: My intuition tells me that what you're saying would help me understand. But I don't understand it (or only dimly) as you present it. Are there readings that have provided Ahas for you in developing this thinking, which might be useful to me in understanding it?

[Greg Ransom]

Well, the problem is, the "stock" / "flow" distinction as used in this context sort of begs the question at issue.

Can we at a moment in time call it a snap-shot of a flow? And what word do we want to use for that?

Greg: "S is a FIXED measure, a fixed stock, measure IN THE PAST."

If that's what you mean by "S", you are using it to mean something different from other macroeconomists, for whom S is a flow. That's OK.

[Greg Ransom]

Nick, the underlying, unspoken problem of central significance in all of this the mixing and muddling of real goods / barter economy marginalist thinking with money measured / aggregate Ricardo category / non-marginalist thinking, isn't it?

If you talk about a flow of income, savings, consumption in terms of actual goods in a barter / pure marginalist construct, that is one thing.

If you talk of these things "measured" in dollars in a pretend circular flow model of the real world or in some Keynesian mish-mash, that is another.

Keynes and macroeconomics attempts to have its cake and eat it too, mixing and muddling the two

If I've expended money on some stuff, and measure that value in money expended, when I open my box of stuff, that stuff could turn out in the next instance to have no value in use for anyone, for any number of reasons. It could have rotted, etc.

The smoke and mirrors trick, the look over here not over there trick of "macroeconomics" is to project money measured valuations of real goods from the past or immediate present to the future.

And trick of using money measures combined with a machine that takes value from the past and extrudes it into the future is a trick that rules out marginalist and choice thinking when it comes to the alternative choice of alternative production goods across the future.

These don't exit by the conceptual fiat of the money measure / value extrusion machine.

[Greg Ransom]

Nick, you've told me:

Capital is a stock.

Savings is a flow.

And Scott Sumner has told me:

Savings = production goods measured in money

So ....

Stocks = flows ??

[Nick Rowe]

Greg: "And Scott Sumner has told me:

Savings = production goods measured in money"

And what Scott meant (or should have meant) is:

Saving[no 's'] = [flow of newly-produced] production goods measured in money.

If Scott were a horse he would be a hunter; you can't expect him to do dressage.

[Kevin Donoghue]

If Scott were a horse, could the horse-manure be any more plentiful? I'm bewildered by his latest. Is everything I've ever read about the balanced budget multiplier all wrong, or is he just playing word-games?

[Greg Ransom]

Steve Roth, Roger Garrison gives an intuitive, graphical expression to these ideas in his Hayek vs Keynes Powerpoint presentation found here:

http://www.auburn.edu/~garriro/macro.htm

[Steve Roth]

Hey Nick I just came across this comment (by "Steve"!) on a Sumner post:

"it’s important to remind laypersons that the “economist’s S” = I. Most people in business or consumer economics think of saving as money in the bank or under the mattress, i.e., money hoarding. They also think that money hoarding is morally virtuous and should be rewarded with above zero interest rates. So it’s really important for you preface your discussions with the reminder that money hoarding isn’t S."

Scott agreed.

Short version of your post here might be:

Don't call it saving. Call it investment. Which is what it is.

And what results is not increased "national savings", but a larger stock of fixed assets.

??

But still wondering about how individual saving/not spending creates loanable funds...

[Nick Rowe]

Steve: "But still wondering about how individual saving/not spending creates loanable funds..."

It's easier if we stop thinking of saving, and instead think of a (flow) demand for non-monetary financial assets called "bonds".

You can do 5 things with your income: buy C, buy I, buy A, buy bonds, hoard money. Then remember that you can buy negative amounts (i.e. sell) negative amounts of A and bonds, and dishoard money. If people are different there will be a flow trade in bonds. That's the "market for loanable funds". Trouble is, the only case in which the flow of bonds bought will equal total investment is if all investment is financed by selling bonds, and bonds are only used to finance investment (not consumption, antiques, or hoarding). Otherwise you have to rig the accounting to make it work. "You sold bonds to yourself", and "we net out consumption loans in the demand for bonds", etc.

[Jacques René Giguère]

Steve: but for lot of people, saving and investment mean the same thing and are also synonym with cash hoarding and bond-equity buying .

[Thomas Zaslavsky]

Regardless of the details, it's clear that the word "saving" means very different things in everyday life and in economics. Hence, much confusion. An analogy: "work" in physics is not at all the same as "work" in everyday usage. This causes much confusion until the physics student learns that work(physics) is an integral, pure and simple. I'm gathering from this discussion that "savings"(economics) is* a fairly arbitrarily chosen name for the residue of income - expenditure(economics). I'm still not sure what expenditure(economics) is [is my new refrigerator expenditure or not? I think it is but as a capital good it doesn't qualify to be "expended on"(economics)], but I'm sure that savings(economics) != savings(ordinary). This has bothered me in economics reading as much as "work" did in physics class, but in the long run physics has been much easier to understand.

* "Savings" is a plural word. It got singularized by billboard writers (?) about 1980. "Saving" is a process, which results in the object called "savings". A slightly different usage: If you get a discount of $5, you saved $5, so you have a saving (singular) of $5. Now don't you feel better?

[Nick Rowe]

Thomas: I tend to use saving singular for the flow, and savings plural for the accumulated stock. The refrigerator is a lovely example we get our students to discuss. If it's seen as an investment rather than a consumer good (which strictly it is, because it lasts and yields a flow of services for many years) then buying a fridge is "saving".