Home > Main > Again: I Does Not Equal S

Again: I Does Not Equal S

January 18, 2012

Remember when I wrote this brilliant insight a while back? Well, over the last few weeks there has been an upswing in this whole debate.

S doesn’t equal I, at least not for the last few hundred years in the United States. I don’t know why you’d bother thinking through a world where S=I. It happens so rarely and so infrequently, it’s like taking welding goggles with you everywhere as preparation for an eclipse.

Here is Scott Sumner responding to JKH over his statement “you are assuming a closed economy with a balanced budget”:

JKH, Both Wren-Lewis and I are assuming a closed, balanced budget economy. That’s not the issue being disputed.

So your complaint has no merit. I’m quite certain even Wren-Lewis would agree with me.

Last I checked, our budget hadn’t been balanced for a decade, and is going to be 8% of GDP or so.  Then we have this shocking Balance of Payments issue that’s another few 5% of GDP or so.  In other words, the argument has merit due to real world observations of what actually happens in our economy. 

This is a funny statement from JKH addressed to Scott Sumner :

There’s something wrong (and there has been from day one) if his opinion matters that much to you. Although, seems like you’re not the only one in that regard.

If you’re right on stuff, you should be able to ignore him and still prevail in the longish run.

If you’re not right on stuff, it won’t matter either way.

We are creating a new, more accurate economics, with a better way of thinking through issues. And the old guard doesn’t see it yet. We will prevail.

Update: This other quote from JKH shows exactly why this all matters:

The corresponding “saving” numbers are those generated per accounting period. For example, suppose the government runs a $ 1 trillion deficit and the economy adds $ 2 trillion in real assets, both in a given year. Then incremental NFA is $ 1 trillion, incremental investment is $ 2 trillion, incremental private sector saving is $ 3 trillion, and incremental national accounts saving is $ 2 trillion.

When you take G-T out of the equation, you’re making the ability hoard “impossible” inside the toy world. Then when you see something which appears to be hoarding in the real world, you’ll be absolutely confounded. It will appear mysterious and in need of a complex explanation, when all you need is to do the accounting correctly.

You get bonus points for recognizing hoarding is related to inflation rates.

 

 

About these ads
Categories: Main
  1. January 19, 2012 at 1:57 am

    The main problem I see is conflating the money circuit with the real circuit and talking about them as though there is a one-to-one relationship between them.

    When we know that isn’t the case. Banks buffer the money circuit

    Almost all the mistakes I’ve seen from economists are to do with a mental leap to a starting point (assume we’re at NAIRU, assume an economy with money already in it, assume that 50% of people are on the Basic income Guarantee), without bothering to explain the dynamics of how we get to that starting from here and whether the dynamics will allow you to get to that starting point.

    Without that link to the real world, these models are ‘thought experiments’ as Sumner puts it so arrogantly – and therefore have no relevance to the discussion about our real economy other than as propaganda weapons.

    heuristic assumptions may be useful to construct a model, but until you do the work to show that the assumptions can be derived from where we are now, then the model is merely a toy for the purposes of intellectual self-satisfaction.

    • TC
      January 19, 2012 at 8:47 am

      “and therefore have no relevance to the discussion about our real economy other than as propaganda weapons”

      This was part of the reason I went after the No-ponzi so hard a few months back. These assumptions are good for starting booze filled arguments over nothing, but not good for solving real world problems.

      Not only do you need to be careful with an assumption making sense, you need to have it be …well I don’t yet know the word for it. It needs to be something “observable enough”. I had reached out to a philosopher/lawyer friend of mine on this question but I have not heard back from him on this topic yet. I suspect this answer will cost a bottle of wine.

      Nick Rowe is trying to bring econ to the masses. JKH and a few others are trying to show the only way to do econ is to get the accounting 100% correct first, and then use the accounting as a check at the end too. It’s the only way in a money economy. THE ONLY WAY.

      The reason for this is the accounting definitions are enforced by the value we give to the separate parts of the equation. This is done through money.

      In JKH’s example of how it all adds up, we’re valuing some equity at a money value. It’s not stuff anymore.

      And this is why JKH is railing about the distinction between the actual stuff on one side of the balance sheet and the claims to that stuff on the other side. Those claims are where the notional world of money and the real world of “reality” make a pact and settle for peace.

      • January 19, 2012 at 3:26 pm

        ” the only way to do econ is to get the accounting 100% correct first, and then use the accounting as a check at the end too. It’s the only way in a money economy. THE ONLY WAY.”

        ABSOLUTELY CORRECT! I admit that I am incapable of doing the accounting myself, not because its un fathomable to me but just because I havent taken the time to learn it, but its so obvious to me that accounting correctly for something is the only way you know it happened. It is utterly jaw dropping to me when I see people dismiss MMT arguments as “just accounting”. Like they tell us in anesthesia school about our charting/record keeping “If you dont document it, it didnt
        happen”. Why do they say this? Because if you get into a court of law and a you are asked if you did something important to the case or not, if it is not documented it didnt happen. They dont “take your word” for it.

        I would argue that money is THE most important legal construct that we have. Accounting is what we call the method for “charting” the presence of this legal construct, so if you get the accounting wrong you are violating the charting rules of our most important legal construct.

        Problem now is that the same guy who is making up the rules of the legal construct is breaking them and getting to serve as the judge and jury.

  2. JKH
    January 19, 2012 at 7:15 am

    I stray to the dark side occasionally, to plumb the system and get a general sense of its state of disarray.

    Always the same result – Groundhog Day – with total confusion

    Recent debates in and around MMT are like lemonade spilt at a picnic, compared to the 100 years’ war of high church monetarists and NKers.
    :)

    • TC
      January 21, 2012 at 11:44 am

      Check out NR’s post today on using fiscal policy. Pretty good.

  3. wh10
    January 19, 2012 at 7:25 am

    “Always the same result – Groundhog Day – with total confusion” – hahaha perfect

  4. January 19, 2012 at 7:43 am

    @JKH Is there a web page/book chapter that explains the details being discussed accurately or did you have to piece it together on your own? I ask because I’m working with a CPA to make a S=I / paradox of thrift for dummies blog.

    • JKH
      January 19, 2012 at 10:32 am

      Sui generis (generic financial accounting + thinking)

      And, to be sui generous, a recent sprinkling of it here:
      :)

      http://www.asymptosis.com/an-mmt-thought-experiment-the-arithmetic-and-political-mechanics-of-net-financial-assets.html#comments (most of the comments)

      http://www.asymptosis.com/saving-equals-inventory.html#comment-3559

      • beowulf
        January 19, 2012 at 7:01 pm

        What, no offer of a lock of your hair? :o)

        “And this is why JKH is railing about the distinction between the actual stuff on one side of the balance sheet and the claims to that stuff on the other side. Those claims are where the notional world of money and the real world of “reality” make a pact and settle for peace.”

        This reminded me of Roger Martin’s book Fixing the Game and his distinction between real markets and expectation markets.

        In the NFL there is the real market when teams take to the field to play a game. Real touchdowns and real field goals are scored. And there is the expectations market: gambling. “Gamblers try to guess who will win a given game on a given Sunday and place bets based on that expectation.” The bets are balanced on either side through the use of a point spread which is similar to stock price in business.
        But unlike American capitalism, the NFL looked thoughtfully at the relationship between the real game and the expectations game and identified a serious danger….They clearly saw that the pressures of the expectations game could do serious damage to the real game…it could destroy the sport….[they] have enforced a strict separation between the real market and the expectations market…exactly the opposite of the way we have managed it in business.”

        http://www.leadershipnow.com/leadingblog/2011/06/fixing_the_game_what_capitalis.html

        • JKH
          January 23, 2012 at 12:00 pm

          thanks for that first link, beowulf

          I can relate to that

          Also, on the side panel there, his rendition of ‘MacArthur Park’ is epic
          :)

  5. Dunce Cap Aficionado
    January 19, 2012 at 9:12 am

    “you need to have it be …well I don’t yet know the word for it. It needs to be something ‘observable enough’”

    How about ‘reporducably obvserable’

  6. January 19, 2012 at 8:46 pm

    It’s all really just a matter of who’s got a prettier model with Sumner et al, rather than who’s getting closer to what current reality looks like. To be pretty and neat, the model’s got to be closed and always in equilibrium. I don’t think they’re really trying to solve the world’s problems.

    • January 20, 2012 at 1:50 am

      That’s the problem in a nutshell. To get to the neat model in engineering you generally have to build quite a few butt ugly ones and refactor them as you test it against reality.

      I doubt the weather forecasting model is that pretty either but it handles the non-linearities pretty well these days.

      • TC
        January 21, 2012 at 11:46 am

        There was some revolutionary study a few years ago about weather showing there was considerable room for forecast improvement.

        Should look that one up.

  1. No trackbacks yet.
Comments are closed.
Follow

Get every new post delivered to your Inbox.

%d bloggers like this: