I am told that this is taught in macro 101. I took macro 101 many years ago and never learned this accounting identity. I'm currently trying to look up the explanation, but I can't find the casaulity.
I find that Austrians are better at explaining this stuff than others, so can anybody explain the reasoning?
The best I can find so far is,
The real (inflation-adjusted) national income, Y, is defined as Y = G + X – M + PX + I Y = GNP G = Govt' spending X = exports + foreign transfers + property income M = imports PX = Private spending I = Private investment (note, I left this out by mistake the first time. Sorry!) Subtract T from each side, where T is taxes and government transfers we get Y – T – PX - I = [G – T] + [X – M] Private Net Savings = [G – T] + [X – M] Private Net Savings is GNP - taxes - private spending (PNS is private disposable income less taxes less private spending on consumption less private investment).
Is the assumption that government expenditure constitutes savings?
If the government runs deficits, then it issues bonds. It's generally assumed that private individuals purchase these bonds. Thus, government deficits = private savings. Of course, it isn't as simple in real life.
Political Atheists Blog
From my perspective, net private savings would be defined as private savings in excess of private investment.
This is the answer then. It's just a lack of understanding of the definitions. My initial reaction was based on the idea that "net private savings" was all private savings, and so I didn't see the causality between deficits and net private savings. But, now that I understand that "net private savings" exclude savings that have been invested by the private sector, there's no more confusion.
So, net private savings simply refers to savings held by people financing government debt, minus the capital surplus(?).
Jonathan M. F. Catalán:So, net private savings simply refers to savings held by people financing government debt, minus the capital surplus(?).
This is Keynesian theory, so we're not concerned about capital. :)
But honestly, I'm not too clear what you meant by "capital surplus", so perhaps you can clarify?
i.e trade deficit. I meant capital account surplus.
Jonathan M. F. Catalán:So, net private savings simply refers to savings held by people financing government debt, minus the capital [account] surplus(?).
Net private savings would be an increase in government debt privately financed minus the capital account surplus, within a given time period.
This can be otherwise stated as:
S - I = [ (G + TR) - TA ] - (M - X)
S - I = Net Private Savings (private domestic savings minus private domestic investment) G + TR = Government Spending TA = Taxes M - X = Current Account Deficit (contra Capital Account Surplus)
This is apparently the source for the fuss about "net private savings":
http://krugman-in-wonderland.blogspot.com/2010/07/is-deflation-enemy-or-is-it-inflation.html
There's someone posting some arguments, which frankly, don't make any sense, even from a Keynesian point of view. I will take a look into this.
AP Lerner (the guy who replied in the blog post defending interventionist economics) provided the following link. It is called "Econ 101".
Economics 101
I believe this framework is flawed.
1) It uses an accounting identity to conclude that an increase in public debt equals an increase in private savings. The statement is true according to the definition. But I contend that accounting identities have nothing to do with economics; they ignore the market as a process.
2) His island analogy ignores the nature of money as a commodity that arises in an unhampered market. The sea shell assumption oversimplifies the situation to the point of error. The actors simply would not "decide" to use seashells. When silver enters the picture, they simply would not "decide" on an exchange rate. Even in a simplified analogy, money would have to be dealt with in a more realistic manner than this to avoid errors in theory.
3) The description of exchange value is erroneous. It appears to be labor theory of value, or some kind of objective value, in disguise.
4) Does anyone know what "leakage" is or why it's relevant?
5) The section on "Deficits" is flawed. The conclusion should be that the creditor obtained currency plus a note receivable with interest, and the debtor provided currency and a promise to pay with interest. He says the creditor receives a "surplus" and the debtor incurs a "deficit" which offset. Of course they offset from an accounting standpoint, but so what? He seems to equate a "private surplus" in this context with real savings.
He then shows an impressive chart of Japan with bars expanding and contracting together that show how government deficits equal private surpluses. He ignores the reality that government deficits represent what SOME people owe to OTHER people.
Some people (the taxpayers) have notes payable, and other people (investors) have notes receivable. To say that private surpluses increase with increased deficits is the same as saying private notes receivable increase when government debt increases. True statement. But the accounting identity does not prove that deficits are helpful in recessions as is being implied. It simply means that someone is keeping a tally of how much is owed from one group to the other group. That is what his charts represent, nothing more.
Discussion?
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
I don't know if this is the way he uses it, but leakage is tradionally savings in monetary terms that are not invested.
Jonathan - "but leakage is tradionally savings in monetary terms that are not invested."
Another interventionist concept? I don't see how a concept like that is useful in economic analysis, except in the situation where one is trying to intervene in the economy.
This is how I see the Austrian vs. the interventionist economic framework:
The Austrian framework is foundational, from the ground up. It begins with the most basic element, the human being, and builds economic theories from there.
The interventionist framework is from the "top down", but it never gets down into the foundation. The interventionist theorist "hovers above" the economy. Looking down from afar, the interventionist sees aggregates. He sees correlations that he assigns equations to. It is an ad hoc approach.
"Econ 101", and AP Lerner's posts, really made this clear to me. (by the way, I liked your responses to AP Lerner on that other blog, nice job).
chloe732:AP Lerner (the guy who replied in the blog post defending interventionist economics) provided the following link. It is called "Econ 101". Economics 101 I believe this framework is flawed.
Thanks for posting this. I've been reading though some of his material through the "Econ 101" link, and honestly, they're just a bunch of incoherent ramblings that make absolutely no sense whatsoever.
He would surely flunk out of any introductory macro class offered in many colleges.
I've posted a response as userid XYZABC on the blog, and called him out on his claims about Fed operations, which were factually false. He didn't take on my challenge, but seemed not to want to debate the blog post anymore, and then he deferred to a whole bunch of other links he posted.
His "arguments", if you really can call it that, is a whole bunch of copy and paste from other econ blogs (from those, who know what they're talking about), interwoven into some bizarre econ theory, and it's so laughable. Those same sources contradict him by saying the complete opposite of what he's claiming.
I'm curious chloe732, where did you find that "Econ 101" link? Is he posting on another blog now?
It's "useful" depending on what "branch" of Austrian banking theory you consider yourself a part of (although, all Austrians tend to agree that a rise in demand for base money will lead to an increase in supply of base money, although obviously there is some lag in time). Say there is a rise in demand for money, but some of this money is stored under mattresses (or is simply not loaned out), this is analogous to a general fall in the volume of money (in circulation, which is what matters). The structure of production necessarily becomes shorter and narrower, regardless of a change in society's time preference. This topic is dealt with by Jesús Huerta de Soto in his treatise on business cycles.
Of course, in a free market the amount of "leakage" which occurs is probably very low, especially if we assume that a free market in banking would effectively minimize the occurances of "depressionary shocks" to expectations.
Think Blue: "I'm curious chloe732, where did you find that "Econ 101" link? Is he posting on another blog now?"
Go to the link you provided above, to the Krugman in Wonderland blog. Scroll down to AP Lerner's post about 3/4 of the way down. He provided the link to Econ 101.
By the way, what do you think of my critique of it?
chloe732:Go to the link you provided above, to the Krugman in Wonderland blog. Scroll down to AP Lerner's post about 3/4 of the way down. He provided the link to Econ 101.
For some odd reason, I can't find the link. Maybe he removed it from his post? But anyways, that's not really important anymore.
Here are my comments about your critique of his Econ 101:
chloe732:1) It uses an accounting identity to conclude that an increase in public debt equals an increase in private savings. The statement is true according to the definition. But I contend that accounting identities have nothing to do with economics; they ignore the market as a process.
The macro account identities do a provide a method of categorizing data, and showing necessary economic relationships. For example, the accounting identity savings must equal investment is a reality not disputed either by the Austrians or mainstream economic schools of thought.
But yes, they do ignore market process, since the formulas are just a snapshot in time.
chloe732:2) His island analogy ignores the nature of money as a commodity that arises in an unhampered market. The sea shell assumption oversimplifies the situation to the point of error. The actors simply would not "decide" to use seashells. When silver enters the picture, they simply would not "decide" on an exchange rate. Even in a simplified analogy, money would have to be dealt with in a more realistic manner than this to avoid errors in theory. 3) The description of exchange value is erroneous. It appears to be labor theory of value, or some kind of objective value, in disguise.
He is absolutely making no sense whatsoever. It would give me a headache for me to disentangle his convoluted reasoning.
chloe732:4) Does anyone know what "leakage" is or why it's relevant?
I don't know what he means by "leakage" either. In Keynesian thought, there's a saying that "leakages must equal injections", which is another way of stating the economy must be in general equilibrium.
For examples, savings must equal investment, else there might be a "leakage" of savings over investment, drowning the whole economy in a savings glut.
chloe732:5) The section on "Deficits" is flawed. The conclusion should be that the creditor obtained currency plus a note receivable with interest, and the debtor provided currency and a promise to pay with interest. He says the creditor receives a "surplus" and the debtor incurs a "deficit" which offset. Of course they offset from an accounting standpoint, but so what? He seems to equate a "private surplus" in this context with real savings. He then shows an impressive chart of Japan with bars expanding and contracting together that show how government deficits equal private surpluses. He ignores the reality that government deficits represent what SOME people owe to OTHER people. Some people (the taxpayers) have notes payable, and other people (investors) have notes receivable. To say that private surpluses increase with increased deficits is the same as saying private notes receivable increase when government debt increases. True statement. But the accounting identity does not prove that deficits are helpful in recessions as is being implied. It simply means that someone is keeping a tally of how much is owed from one group to the other group. That is what his charts represent, nothing more.
In macro and internal trade theory, this is known as external and internal balances. He's quoting some other econ blogs about this, but since he does not know what he's talking about, he's demonstrating his complete ignorance of a legitimate concept.
But I completely agree with what you said above in the part I highlighted. His accounting identities and charts do not add any more useful information, then stating an obvious condition. He might as well state that "a circle is round."
wolfman wrote:
I took many Keynesian classes in the last 3 yrs.
Tell me, were you an Austrian before you took those modern (keynesian) macro classes?
From the other thread, razerfish mentioned that the underlying theory might be something called MMT or Modern Monetary Theory.
Basically, MMT is another name for Chartalism, which is Post-Keynesian theory (yes, that is an actual school).
In general, I think it's prudent to familiarize yourself with other schools of thought, even other non-mainstream ones, in the event you encounter some of their adherents.
Here are some useful links after I did a google search:
Wikipedia: Chartalism
Wikipedia: Monetary Circuit Theory
A Primer on Modern Monetary Theory (MMT)
Here is an excerpt from the Wikipedia entry on Chartalism, which explains some of the basics:
Chartalists draw the following conclusions:[6] Private household budgets and national government budgets are not analogous – households must finance their spending prior to the fact (one cannot spend money one does not have, and thus must either earn it or borrow it), while governments must spend first (credit private bank accounts, "print money") before it can subsequently tax (debit private bank accounts). Indeed, if all government spending were collected in taxes (balanced budgets, no national debt), there would be no money for private savings. Government spending is thus the source of funds for net private savings. Government spending is not revenue-constrained. Governments do not "spend taxpayers' funds" – taxation lowers private spending power, but does not provide additional public spending power (governments can spend fiat money by printing it, without needing to finance it). Decreases in national debt yield a decrease in private sector savings, and thus an increase in leverage of the private sector, which can yield a credit bubble. These yield radically opposite conclusions to mainstream economics on national budgeting, arguing that persistent government deficits are necessary to a growing economy. Chartalists are in agreement with Keynesian economists on the desirability of deficit spending for fiscal stimulus in case of lack of effective demand, for partly overlapping reasons. Chartalists disagree with Keynesian economists on the desirability of running surpluses during periods of high effective demand as this will effectively decrease the money supply and therefore increase credit leverage in the economy.
Chartalists draw the following conclusions:[6]
These yield radically opposite conclusions to mainstream economics on national budgeting, arguing that persistent government deficits are necessary to a growing economy. Chartalists are in agreement with Keynesian economists on the desirability of deficit spending for fiscal stimulus in case of lack of effective demand, for partly overlapping reasons. Chartalists disagree with Keynesian economists on the desirability of running surpluses during periods of high effective demand as this will effectively decrease the money supply and therefore increase credit leverage in the economy.