The Debate over Investment and Saving

A number of earlier posts discuss issues relating either to investment/saving or interest rates or both. Many other posts relate to fiscal or monetary policy within a modern monetary system, and these posts also often end up involving discussions of investment, saving and interest rates. It may be worth spelling out the significance of this debate.

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Investment Precedes Saving

One argument sometimes leveled at Modern Monetary Theory that is misplaced is that it puts too much emphasis on the monetary and too little on the real. The charge is misplaced for at least two reasons. On the one hand, it is imperative to integrate money into the analysis of what is a monetary economy. It is the tax basis of the demand for money, for instance, that creates real unemployment. It is the hope of turning a sum of money into a larger sum of money – not real output – that motivates capitalist real investment. Attempts to separate completely the monetary from the real in such an economy fail at the most basic level. But, on the other hand, it is modern monetary theorists, and heterodox economists before them working in Marxian or Keynesian traditions, who attempt to make clear what is going on in terms of the real, while it is the orthodoxy that constructs a mystified view of the world in which the real is allowed to be bound by the monetary, for example by pretending a currency-issuing government is financially constrained in its capacity to boost demand and hence real output.

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Identities Do Not Imply Equilibrium

In macroeconomics, it is often useful to start from accounting identities between aggregate magnitudes. Since identities are true by definition, they offer a good way to organize concepts. However, it is important to keep in mind that identities in themselves say nothing about causation. In order to build a theory on the basis of accounting identities, it is necessary to make behavioral assumptions. Unlike the identities themselves, these behavioral assumptions are of course contestable.

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