Ramanan Lyer on the Keen Change in AD Function – What Lies Between Identities

A fecund debate is taking place at Mike Norman Economics, 119 comments in less than two days, about a post on Ramanan’s blog criticising the new and extended  definition and justification of Steve Keen’s formula for aggregate demand i.e. AD=Income + delta Debt.  The number of comments indicates that either something important has been disocvovered or a major fallacy is out there.

Ramanan

In a recent talk (video here), he claims that income is not equal to expenditure due to debt creation. Keen also claims in the video that Schumpeter and Minsky claimed that is the case.

Keen is right about an individual sector but not an economy as a whole when it is closed.

In other words the accusation is of a fallacy of composition error.

There is no error.  I will outline the case Ramanen makes, some of the key exchanges in this thread and what I hope is a firm refutation of the claim of a fallacy.

This is not the same time we have tackled this conceptual issue.  Just as Ramanen argues that by accounting definition income=expenditure at every point in time we have argued that savings = investment (for loan generated investment) as an entity is only true ex poste over the period of a good loan. An article Steve keen tweeted support over.    It is the same point re accounting, but before getting into too much detail on this point, and I hope in not too mathematical.

Ramanen

Keen forgets that expenditure creates income

He applies the Godley-Cripps approach to budget constraints

 since the possibility of borrowing is included as a source of funds for spending, our formal representation of the budget constraint for any individual or institution including the government, is

Y-E=ΔFA-ΔD

any excess of income over spending must equal the acquisition of financial assets less the acquisition of debts. As this is true for all individuals it must also be true for the economy as a whole.

But since total national income equals total national expenditure (i.e., Y ≡ E) it must follow for the economy as a whole the change in financial assets must be equal to the aggregate change in debt, i.e.,

ΔFA ≡  ΔD

..Keen forgets that consumption is income for firms and his accounting has black holes. The whole thing can be done right by creating a Transactions Flow Matrix, so that one is sure that nothing is missed out….

The right definition of expenditure does not include purchases of financial assets. For Keen if  a household purchases financial assets, it will be counted as “expenditure”. ..Keen’s definition of expenditure itself is different to begin with from standard ones and obviously he gets the paradoxical claim that Income ≠ Expenditure!

But in a closed economy with no government sector modelled Y=C+I.  Ramamam seems to be accusing Keen of confusing consumption (which does not include purchase of financial assets) with investment (which does).  In fact Keen extends the standard Y=C+I identity to Y=C+I+A where A = Assets, of all kinds. I take this as splitting the I element into net income from investment (which contra to Keen is the total of all factor returns from investment in retained assets not simply capital goods – easy danger of a capital theory slip up here) and net income from asset sales and purchases.  This is a useful distinction and allows contrast between the two income streams – and the sources of investment – undistributed profits from retained assets  or increase in net asset sales.

The accusation that ‘Keen forgets that consumption is income for firms‘ No we are talking about the difference between an ex-ante income before a discontinuous injection of debt and then the income (of the economy as a whole) after that injection of debt.

As Keen put it himself in a tweet.

They’re confusing ex-ante & ex-post. Simplest def’n: Expenditure=Income before debt injection plus debt injection.

And Neil Wilson perceptively

Express it like a computer variable assignment: Income = Income + Debt Injection.

Neil had this useful comment on the Mike Norman Thread

Accounting measures income and expenditure at the end of the day using discrete function snapshots.

Steve is measuring income and desires to spend in excess of income at the beginning of the day and following those through the day using a continuous change function.

So income at the beginning of the day + desire to spend realised by borrowing = expenditure at end of day = income at end of day = income at the beginning of the following day.

Essentially you walk into a shop with a credit card and $100 in your wallet. You walk out with a pair of trainers, $100 in your pocket and a credit card debt of $100.

You can still spend $100 during the rest of the day. Your purchasing power hasn’t been diminished by the debt creation and neither has anybody else. Yet a real transaction happened, expenditure generated and income produced.

Between the beginning and the end of the day a number of things will have happened.  The economy will have grown (or shrunk) and the money supply will have grown (through debt) or shrunk (through deleveraging).

If we start with an economy in position T0 at the beginning of the day and T1 at the end of the day then if we have a income Yo at T0 and the economy grows by X then at T1 Y1=Y0+x.  Looking back over the day I1=Y1, but both are greater than I0=Y1.  Because we are used to dealing with discrete time and fallaciously treat accounting identities as true at every point in time, rather than over a period looking backwards in time this is easily misunderstood and to be fair Keen needs to be careful with his terminology here.  Keen’s dynamic approach is based on hunting for the source of the difference, what gets added.  As Marx put it M-C-M’.  So where does the ‘ come from? A pure identities approach will not tell you that – it is platonic and backward looking – the source of the change needs to be identified   Keen has focussed rightly on debt , but it is I hope just the beginning of a wider investigation as the ‘mystery’ of profits also needs explanations of causes in the ability to extend debt, the source of interest, the speed of transactions and the source of successful investment (profit) in order to fully close the monetary circuit.  Each a subject tackled, or about to be, on this blog.

Two of the great rules of the stock-flow consistent approach are that every expenditure is somebody else’s income, and that every asset is matched by an accompanying liability.  But these are necessary but not sufficient axioms for modelling an economy.  Two more must be added, and Ramanen’s mistake is only applying the previous axioms.  These axioms being that at any point in time money can only be spent on one transaction at a time – however quickly it is spent; and that for the economy as a whole the monetary circuit only ever flows in one direction, it can never flow in reverse.

These together mean that if you have a series of t0-t1 accounting identities it does not mean you can reverse them and assume that the t1-to-t0 identities would be the same.  In that time we have seen capital revaluation and destruction, commodities have been created, transformed and consumed in an irreversible process.

How does this apply.  Lets take the specific claims that the ΔFA ≡  ΔD identity is ignored and that Keen has no transactions flow matrix.  The latter accusation is slightly unfair, it is there in his Minsky computer model it just is not generated automatically yet in the Godley and Lavoie format Ramanen would like to see.  the change in financial assets is clearly there in Keens formula’s however these do not distinguish between physical and financial assets.  This allows Ramamen to make the same claim found in (almost) every macro test. Debt and asset values created by debt cancel so debt doesn’t matter.

The flaw in this reasoning is that this equalisation is based, as we have set out on this blog before, on the capitalisation of future anticipated income streams on the (risk and collateral adjusted) assumption that the debt will be repaid in full with interest.  At any point in time the income stream from debts and income streams from repayments of debts will not be in balance.  This is a key insight, not unique to Keen, I have seen various versions of it in Torrens, Holden, Marx, Minsky and Hawtry, it has been key to different theories of the credit cycle for over 150 years, but Keen is the first to express the idea in formal mathematical terms and attempt to model it.

As Hawtry put it.

[producers of intermediate commodities] do not wait for the retail sales, but are paid at the moment of sale with money created by the banks, and then when the final sale to the consumers takes place, the money advanced by the banks has to be paid off. That part of the proceeds of sale is simply destroyed. For just as a bank advance creates money, so the repayment of an advance extinguishes money…

If we suppose the production and sale of [goods] in all the successive stages, to form an isolated operation, then at the beginning there will be an excess of purchasing power and no goods to buy, and at the end an excess of goods and a shortage of purchasing power…

In order that the goods produced in any interval of time may be sold, what is needed is that the incomes occurring in that same interval of time should be sufficient to buy the goods at remunerative prices…

Incomes are the source of demand. But it cannot be assumed that the amount of demand in any interval of time must be equal to the aggregate of incomes. The expenditure of the individual is not exactly equal to his income; he may leave part of his receipts unspent in his cash balance, or he may draw on his cash balance (or overdraw) for expenditure in excess of his receipts

the payments made by the group of traders being in respect of services rendered toward production and other economic activities, will be increased or diminished according as the traders accelerate or retard production. If they accelerate production, they must pay out more in respect of the greater productive activity. There will result an excess of the traders’ disbursements over their receipts, an excess which may be described as a “release of cash”.
The cash released goes to pay additional incomes, and then reappears as additional demand. The additional
demand evokes a still greater productive activity and a further release of cash.
When the traders retard production, there occurs an excess of their receipts over the disbursements or an
absorption of cash. There is a shrinkage of incomes, of demand, of sales, and then a still greater shrinkage of
production.

The release and absorption of cash play an important part in the regulation of credit. What is commonly called an expansion of credit is really a device for inducing a release of cash, while a contraction of credit is a device for inducing an absorption of cash. The release of cash may be effected either with money drawn from existing balances or with money lent by the banks. Similarly an absorption of cash may mean either the accumulation of idle money or the repayment of bank advances. The majority of traders avoid holding idle balances, and borrow just so much from their bankers as their varying needs for working capital require from time to time.

Although Hawtry was at times held back by a Knightian continuous production fallacy where the law of large numbers cancels everything out you will see from the extended quote that he sensed it was the discontinues driving and driven by the change in debt that drove the credit cycle.

In comments Ramenen introduced new objections.

If I (or a lot of people) take on debt to purchase financial assets, it doesn’t add to spending power to the extent Keen supposes. The effect is indirect if people buy assets and if creates holding gains due to price rise in financial assets. But the effect is limited to capital gains (and the propensity to consume out of capital gains) and not to the debt actually incurred.

For Keen it doesn’t matter if the liabilities incurred is for purchases of nonfinancial assets/ consumption or for purchases of financial securities. Both add to the same purchasing power.

In the extreme case (to illustrate) think of my taking a loan and doing nothing afterwords. But for Keen it adds to aggregate demand (now effective demand).

Debt not spent and kept in idle balances does subtract from aggregate demand.  Keen does not cover it but its effect is small.  We have talked about in on this blog before as ‘Davenport’s k factor’ the proportion of granted credit remaining in balances   It is important as we demonstrated through modelling it effects the extent to which idle balances are transmitted bank to bank and so expand net lending power.  But it is small because businesses tend to minimise idle balances especially when they accrue interest and most consumer debt tends to be spent very quickly.

But to state ‘If I (or a lot of people) take on debt to purchase financial assets, it doesn’t add to spending power to the extent Keen supposes.’ is just plain wrong.  if you borrow to buy a house the debt immediately increases the spending power of the developer and, in being used to secure development finance, the incomes of the brickie, chippies, sparks etc. who constructed it.

 In [keens]  models, loans are taken to purchase financial assets. I don’t know how that “adds to demand”.

To which Kis Rosberg perfectly replies

The sellers of these assets buy goods and services.

40 thoughts on “Ramanan Lyer on the Keen Change in AD Function – What Lies Between Identities

  1. > confusing consumption (which does not include purchase of financial assets) with investment (which does).

    No: I is Gross Spending/Investment on Fixed Assets (before CFC — consumption of fixed assets — which when subtracted yields Net Investment in Fixed Assets).

    Fixed assets include structures, equipment [hardware], and software. (Structures is further broken down into creation/remodeling of residential and nonresidential structures.)

    Purchases of financial assets have no *accounting* impact on I. Those purchases do not count as “spending” within the NIPA constructs.

    This confusion about what constitutes “capital” — and whether the stock of “financial capital” accurately represents the stock of “real capital” (which includes but is by no means limited to the feasibly countable “fixed capital”) — IMO, lies at the heart of much of the confusion we find in economics discussions.

      • loanable funds? Where?

        it is not the ones criticizing who are making this ex ante ex post error but it’s exactly the opposite.

        There is a clear accounting error and but it is difficult to argue if you argue that this about investment:

        ” In fact Keen extends the standard Y=C+I identity to Y=C+I+A where A = Assets, of all kinds. I take this as splitting the I element into net income from investment (which contra to Keen is the total of all factor returns from investment in retained assets not simply capital goods – easy danger of a capital theory slip up here) and net income from asset sales and purchases.”

        Wondering since when national accounts has become a matter of opinion and self invented terminologies/ideas?

      • Since when was National Accounts the be all and end all of SFCA modelling. There is much accumulated wisdom here but numerous errors, capital theory errors, errors in treatment of intangible assets, errors in not treating insurance as debt etc. etc. If if was correct in every regard we wouldnt have the huge sectoral corrections columns. You are basically saying stop all economic theorising because the national income accounts have got it all right. There now seems to be a consensus that asset price inflation matters because it riases collaterol values and boosts lending. This is an issue where Keen made the right call and econometricians like yourself need to catch up.

      • “Since when was National Accounts the be all and end all of SFCA modelling. There is much accumulated wisdom here but numerous errors, capital theory errors, errors in treatment of intangible assets, errors in not treating insurance as debt etc. etc. If if was correct in every regard we wouldnt have the huge sectoral corrections columns. You are basically saying stop all economic theorising because the national income accounts have got it all right. There now seems to be a consensus that asset price inflation matters because it riases collaterol values and boosts lending. This is an issue where Keen made the right call and econometricians like yourself need to catch up.”

        Just avoiding the matter.

        I am not saying that national accounts is divine. But at least make an effort to be consistent with them instead of inventing and reinventing terminologies in every comment. Keen has errors in the simple model itself, so why are you brining in insurance?

        That is like bringing in commutation relations in a discussion of a simple mechanical problem.

        The thread started with a simple observation that saving is not equal to investment in the models critiqued. How can asset price inflation bring them to equality?

  2. “Expenditure = Income before debt injection plus debt injection.”

    That expresses future period expenditure as a function of prior period income, which is fine as a functional expression.

    But he should make that time sequence clear in his equation notation. It is Steve who has confused ex post and ex ante in his existing equation.

    And that functional expression is certainly nothing like an accounting identity, for a host of reasons that have already been discussed.

    • There is no confusion at all if you understand that Keen is using continuous time not discrete time, and as continuous time uses different differential equations there is only confusion amongst those who carry there preconceptions with them.

      • You seem to have the notion that differential equations is some divine mathematics which others do not learn!

        Income = Expenditure for an economy as a whole in both differential equation and difference equation formulations.

  3. “But to state ‘If I (or a lot of people) take on debt to purchase financial assets, it doesn’t add to spending power to the extent Keen supposes.’ is just plain wrong. if you borrow to buy a house the debt immediately increases the spending power of the developer and, in being used to secure development finance, the incomes of the brickie, chippies, sparks etc. who constructed it.”

    Since when is a house treated as a financial account in national accounts?

      • The way you are arguing implies you would believe that QE also adds to aggregate demand. What do you think adds or not?

        [These effects are secondary: for example a lot of borrowing to purchase financial assets may led to a boom in equities markets and there may be an increase in aggregate demand depending on whether the actors making capital/holding gains choose to purchase goods and services or not. But that is entirely different from simply adding a term on purchases of financial assets to aggregate demand].

        Second there is no denial of the fact that loan repayments may have an effect on aggregate demand but that is later not now. Your statement is like believing RATEX.

      • “The mortgage is!!!”

        Man, You are thoroughly confused.

        I said Keen includes *purchase* of financial assets in his definition. If I purchase a stock of Apple, it hardly adds to demand.

        You say the seller of securities makes consumption expenditure but why would he do that? This confusion is a Monetarist confusion. If I buy a stock in the morning and sell it at afternoon, will I consume the proceeds. Silly.

        The purchase of a house by somebody is NOT called purchasing a financing asset.

        The mortgage is a liability of the household. It is true that it is an asset for the bank, but these two cancel each other out.

        The one making contribution to demand is Investment which is already included, so the claim of double counting by others.

      • If you purchase a stock from apple from a loan it adds to demand. An asset and liability cancel each other out only in terms of capitalisation – a stock- not at every point in times as money flows. Debt amortizstion is none linear. Any mortgage broker would tell you you are wrong. Do a simple debt amortization schedule and you will get the point hawtrys also. At the beginning of the loan there is a net afdition to demand at the end a net deduction very basic error.

        Sent from Samsung Mobile

    • @ramanan: “Since when is a house treated as a financial account in national accounts?”

      When it’s an existing house. Purchasing it is an asset swap. Has no impact on the NIPAs, only FOFs.

      • Makes me wonder, I’m not totally sure: is residential structure investment the builder’s spending, or the spending to purchase the new house from the builder. I assume the latter, cause that’s how value-added accounting works — final goods, value (and value add) can only be determined by sale price, all that. But the builder’s spending is the actual investment, right? He then sells an existing house, which in normal (existing) home sales counts as an asset swap. Curious stuff.

      • Suppose you build your own house, spending $100K (including paying yourself for your time). It doesn’t sell, but you figure it’s worth $150K. GDP should go up by $150K, but I (“Investment Spending”) should only go up by $100K. Or less if you don’t count the value of your time. “Home work” isn’t counted in GDP. ??

      • Steve,

        A house is not a financial asset in the flow of funds account. It is counted as a nonfinancial asset.

        In the flow accounts, it is gross fixed capital formation for households.

        All that in SNA.

        I think NIPA on the other hand does something funny I am not very familiar with it.

      • @ramanan: house purchases are “gross fixed capital formation” in the FOFs, but ??? in the NIPAs.

        Boy am I continuing to be confused. Wikipedia:

        “GFCF is called “gross” because the measure does not make any adjustments to deduct the consumption of fixed capital (depreciation of fixed assets) from the investment figures.”

        Okay, so it’s the same thing as Gross Investment (Spending)?

        But:

        “GFCF is not a measure of *total* investment, because only the value of net additions to fixed assets is measured”

        WTF??

        “and all kinds of financial assets are excluded, as well as stocks of inventories and other operating costs (the latter included in intermediate consumption).”

        So by suggesting that financial assets are part of “*total* investment,” they’re doing the typical thing here — confusing “investment” (buying financial assets) with cap-I Investment — creating/purchasing fixed assets.

        And, this:

        “The most important exclusion from GFCF is land sales and purchases.”

        Do the FOFs break out the land portion of real-estate purchases from the structure portion? I don’t know.

      • “Suppose you build your own house, spending $100K (including paying yourself for your time). It doesn’t sell, but you figure it’s worth $150K. GDP should go up by $150K, but I (“Investment Spending”) should only go up by $100K. Or less if you don’t count the value of your time. “Home work” isn’t counted in GDP. ??”

        I think it should proceed along the same way inventories manufacturers hold are treated in national accounts. However SNA values them at market prices when calculating profits.

        if you remember the transactions flow matrix … what you do is add a capital account to the household sector and have +150K in current account and -150K in capital account.

        Maybe think carefully and will get back. Think it should increase your saving. Also GDP will go up by 150K.

      • @ramanan: “what you do is add a capital account to the household sector”

        Yes it seems like this would be a huge improvement in the national accounts. But it would require them to model households as they model businesses, which adds some (difficult? insuperable?) complications… Insuperable at least as the accounts are currently constructed and measured. They should really just shift to Godley (or even better, Ramanan!) accounting. 😉

      • “Suppose you build your own house”

        Sorry.

        Missed “your own” in the first go around.

        That’s an unusual situation isn’t it? You presumably have no business accounting in that sense, meaning no profit line. I’d guess the material inputs to the house construction are entered into GDP in that way, rather than the “value” of the house.

        On the other hand, if you have business accounting, you must value the house according to some reasonable criteria. Don’t know what that means exactly, but presumably that value if legitimate goes into GDP. And that goes on your personal balance sheet if you transfer the asset from your business to your personal holdings and that is an asset swap.

        I view NIPA/SNA conversions as messy rather than substantial. New housing ends up being a real investment flow in the normal course. But your example is unusual if done outside of a legal business accounting and reporting framework it seems to me.

        – Asset swaps can be for real or financial assets

        – Purchase of financial assets or real assets that existed prior to the current accounting period are not included in the normal meaning of “aggregate demand” or “expenditure”

        – “GFCF is not a measure of *total* investment, because only the value of net additions to fixed assets is measured”:

        confusing, but looks to me that “total” there is meant to refer to total outstanding stock rather than the investment flow addition to stock in the current accounting period

      • Steve R,

        I think acquisition of land is included in the “capital account” but as acquisition less disposals of non-produced non-financial assets. I think the distinction is made from gross fixed capital formation because so much importance is given to production. But it is a bit funny because GFCF also includes machines purchased from abroad which are not domestically produced.

        “So by suggesting that financial assets are part of “*total* investment,” they’re doing the typical thing here — confusing “investment” (buying financial assets) with cap-I Investment — creating/purchasing fixed assets.”

        Yeah!

        “Do the FOFs break out the land portion of real-estate purchases from the structure portion? I don’t know.”

        Donno either.

        On households, the SNA does have household accounts like the production firms but i think NIPA may not and hence there is something strange going in NIPA about investment in residential houses.

        Btw about you building your own house. Take a simple example. Your income from salary just takes care of your taxes and bills and consumption so we can neglect these.

        You finance your home construction by taking a loan of $100K.

        Your income is +$150K and expenditure is $100K. So saving is $50K. However Net Incurrence of Liabilities is $100K and NAFA is 0, so net lending is -$100K.

        which makes sense because saving minus investment is $50K – $150K which is minus $100K.

  4. “Because we are used to dealing with discrete time and fallaciously treat accounting identities as true at every point in time …”

    Nonsense. They ARE true at every point in time, unless you apply inconsistent and illogical time sequencing to the time period under consideration. You cover at least two different accounting periods with Steve’s equation. But you don’t specify that. Just specify it and you’re OK as far as that aspect is concerned.

    And accounting identities don’t just apply to the past; they constrain feasible future outcomes.

    “the ‘mystery’ of profits also needs explanations”

    No mystery. It’s all taken care of by proper equity accounting.

    Etc. and on and on like that …

    …………

    And there’s absolutely no issue of substance here regarding the difference between discrete time and continuous time.

    To suggest otherwise is to confuse continuous time with mathematically continuous accounting events. The former is conceivable. The latter is not.

    The analytic infrastructure for accounting logic is premised on the reality that accounting events are recorded discretely, within discrete accounting periods

    …………..

    Planned expenditure (or future realized expenditure) (ex ante) must be equal to planned income (or future realized income) (ex ante) at the macro level, which is what we’re talking about. Whether or not they’re equal at the micro level is not the point, and whether or not they’re equal or unequal is both an ex post and an ex ante concern in that regard. The relevant planning function here is not the intellectual attitude of dissavers who individually or collectively don’t understand that their dissaving will force the creation of offsetting saving elsewhere in the economy. Such an outcome is an accounting tautology. The relevant planning function here is the macro level intellectual comprehension that the applicability of accounting tautologies is itself continuous over time. If only one person in the world understood that, it wouldn’t negate the fact that such a planning function does exist.

    A fundamental and absolutely brutal logical error being made here by Steve’s group is that they truly believe that accounting identities only apply ex post. That is patently false. You can’t model a future economic outcome that is viable if that outcome is not stock flow consistent and doesn’t respect accounting identities in the future. If you think you can do that, your model will collapse from internal inconsistency. Your result will simply be non-viable. (I’m afraid this has happened with respect to Steve’s equation AS IT IS CURRENTLY NOTATED. IT COULD BE REPAIRED AND PROPERLY CONVERTED FROM A MANAGLED ACCOUNTING EXPRESSION TO A DIGNIFIED REGRESSION RELATIONSHIP, AS I HAVE SAID A NUMBER OF TIMES IN VARIOUS PLACES RECENTLY.)

    This all applies whether your modeling of future outcomes is in the form of discrete possibilities or probabilistic expectation.

    Steve’s equation would begin to take on a more rationally precise meaning if he identified by notation very specifically that he is dealing with at least two different accounting periods – prior income and subsequent aggregate demand (and expenditure and income). That’s the core problem with it. There are other subsidiary difficulties, such as pretending that a regression model is an accounting identity. But the main one is time inconsistency.

    And again, this has nothing to do with continuous time versus discrete time. If he wants to model continuous time, he at least should acknowledge via appropriate notation that the starting income level is the continuous income rate PRIOR to the DISCRETE POINT of debt addition and that the subsequent aggregate demand or expenditure level is the continuous rate of that aggregate demand or expenditure SUBSEQUENT to the DISCRETE TIME POINT of debt addition. But all of that continuous stuff is just trivial, because the time ordering of the accounting recognition must hold whether in continuous time or discrete time.

    • you seem to be conceding that although planned investment (exante)=planned savings (ex ante) and realised investment (ex poste) = realised investment (exposte) but that planned investment not equal reliased investment. That is all anyone has been saying, that their has been a false conflation between ex poste and ex ante. the confusion lies on the critics side not on Steve or mine.

      Your last para is a mathematical mistake that sums up the confusion. When their is a discontinuous instantanious leap the income level can be two different values at EXACTLY the same point in time – which is why we need different methods. It is only when you go to discreet time can you talk of ‘before’ and ‘after’ and in a radically uncertain future why you can only talk of ex poste realisation of actual accounting identities.

    • The concept of ‘planned savings’ is a chimeria, it imagines a rational and prescient agent with a fully SFC model in their heads who is never wrong. Of course people often are, firms go belly up and accounting write offs are necessary to reconcile accounts. Such adjustments of course can only be made ex poste. Professional accountants I know who have been following this discussion are adamaent that accounting theory re identities only applies ex poste. Of course since we have growth savings realised through investment can be greater than the investment itself, a reason why Basil moore could never get the Kahn /Keynes multiplier.

  5. “When their is a discontinuous instantanious leap the income level can be two different values at EXACTLY the same point in time”

    No.

    The discontinuous leap is represented as double entry bookkeeping.

    It is the double entry that ensures that expenditure equals income at all points.

  6. “GDP should go up by $150K”

    No Steve.

    The last $ 50K is an unrealized capital gain.

    It’s not a part of GDP – no more than is the capital gain on a stock.

    It’s balance sheet accounting.

    GDP is income statement accounting.

  7. “Professional accountants I know …”

    This is about the use of accounting, not professional accountants.

    Accounting is used ubiquitously in risk management simulation (of the future) – to model feasible outcomes.

    Accountants are often nowhere to be seen in such exercises.

  8. Pingback: The Profits (& Growth) Puzzle – A Tentative Solution to Finding and Keeping the Economics Grail « Decisions, Decisions, Decisions

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s