More on “Savings” and Investment: I’m Not Alone

Three updates on this topic:

1. I’m pleased to receive at-least partial support for the notion bruited in my previous post on this topic (“Savings Equals Investment Equals…Zero?”) in comments from Nick Rowe, whose knowledge of economic theory and Economics history exceeds mine as Jupiter exceeds Mercury:

Why *should* we define “saving” as “Y-T-C”? We (economists) define it that way, but we don’t have to. Is this the best way to define it? It’s not obvious that it is.

2. In comment discussions with Nick, I managed to crystallize in brief why the NIPAs’ S=I identity and definition of “Savings” don’t make sense to me:

According to the NIPAs, fixed investment is both spending and saving. If that’s not contradictory enough in itself, think about it: if you take $10,000 out of the bank and buy ten computers for your employees, is that “saving”? Not, it seems to me, by any known understanding of the word. Exactly the opposite, in fact: it’s spending out of accumulated savings — dissaving.

You can only make it make any kind of sense if you 1. think in national aggregates, which is reasonable, and 2. assume that all savings are instantly (within-period) intermediated into fixed-investment spending (none into consumption, and none stored away in financial assets), which is both unreasonable and false.

Update: Or: all withdrawals/dissavings used for fixed investment spending are instantly (within period) and exactly deposited as savings by the recipients, but this is not true of consumption spending: that money never touches ground as “savings,” but simply recirculates in infinite regress. IOW, consumption spending never touches the banking system. Plausible? Useful?

3. In a passing reference by Randall Wray, I came across Lawrence Ritter’s 1963 “An Exposition of the Structure of the Flow-of-Funds Accounts” (PDF). These accounts, first published in 1955 (20+ years after the NIPAs), finally did for the financial economy what the NIPAs did for the real economy. Ritter sought to explicate them so economists would start actually using them in their work.

But I thought I noticed a big problem in the exposition, and it seems I’m not alone. Roland Robinson points it out in a Discussion note on the article in the same issue of the journal: “The Flow-of-Funds Accounts: A New Approach to Financial Market Analysis” (sorry, gated). And Ritter acknowledges Robinson’s issue in the article proper.

Here three paragraphs from Robinson’s note that lay out the problem (emphasis mine for easy skimming):

Assets in the flow-of-funds balance sheets are shown at market value. This procedure is both logical and convenient. It leads, however, to a mixed character in other segments of the accounts. If the flow accounts are derived from the balance-sheet accounts by changes in asset levels, these changes include a composite of true new flows of funds and of capital gains and/or losses. If the “saving” account is residually derived from such changes, it includes a great deal more than the difference between receipts and consumption expenditures on current accounts; it also includes the effects of capital gains and losses.

Saving and investment could be derived from the national income accounts, in which case the flow-of-funds accounts would not balance. Since I feel that this procedure would have little merit, let me concentrate on an alternative treatment of the first choice outlined above.

Economic incentives and behavior are probably deeply influenced by capital gains and losses. [Gee — ya think? SR] The Goldsmith wealth estimates have shown capital gains to have been as important as saving in terms of current dollars as a source of wealth. Estimation of capital gains and/or losses and assignment of them by sectors would produce greatly improved accounts and would create the possibility of far more meaningful economic analysis. The process of introducing capital gains and/or losses to the accounts, however, would involve a number of sticky technical problems.

This pretty much echoes what I said in various other ways in the previous post. It’s always nice to feel validated.

But I’m still hoping that some of my gentle readers will be able to blow holes at the waterline of my thinking here…