From Cambridge to Eternity: “Saving is Also Spending”
Chapter
1
The Economy in “Nominal Money”
Suppose
John Greedy McScrooge puts one billion dollars under the mattress on the beginning
of Mach for the purpose of “saving” (for the future). Originally, the money was
earmarked to be spent in the month for widgets. His individual market demand
curve for the widget suddenly disappears. There is an interspatial gap of spending
between the two scenarios, original vs actual.
A
classical economist would account for such a variation in March: ①the aggregate demand curve shifts to the
left; ②the market price declines;
③the real quantity
traded, or sold and bought, declines; ④accordingly, the suppliers in town who happen
to be “rational” collectively reduce the “real quantities” of production; ⑤notwithstanding,
the market is cleared
in equilibrium; ⑥everybody including McScrooge
is happy “ever after,” so to speak.
All
the decisions of self-interest are freely realized. A market rumor,
nevertheless: The victim at the edge of the ruthless law of diminishing returns
opts out of the widget business for the “emerging market,” as it were, of
gadget, with little regard to the Solow model with a shiny decoration.
Now
suppose Jane Normal Citizen of the same motivation as McScrooge’s. She is well
aware that money is of no use under the mattress; yes, it certainly is inconvenient,
the more the more. Ms. Citizen, instead, buys gadgets worth one billion dollars
in March for the sake of using or reselling them sometime in the future.
A
classical economist would account for the variation in the gadget market in March
much likewise as the widget market save the varying direction. A caveat: the
economist would never forget to take care of all the money earmarked for March:
saving of widgets off the market equals
spending for gadgets on the market.
A
researcher in reckoning, or accounting
if we will, would name the first episode “irrational saving” and the second “rational
saving.” At least to Jane Normal Citizen, “Saving equals spending.” See, we
told you so!
On
the flipside, Mr. McScrooge must fade away from Economics of “”Rational People”
(to Gregory Mankiw). In the first place, John Greedy McScrooge is Homo Sapience but not Homo Economicus.
Chapter
2
The Economy in “Real Quantities”
The
definition identity: S≡ Y- (C+G)
The
accounting identity: Y≡ C+ I+ G
The
concluding and closing identity: S≡ I.
See, we told you so!
Chapter
3
The Economy in Cambridge
There is no place for Saving (S) in the sun: nowhere in the liquidity preference, the “money market” (not the one in Finance), the “product market” (not the one in Economics), the “several interacting markets” (Paul Krugman to the IS-LM model, 2011), the AS-AD model or the GEM’s (for general equilibrium model) of so many.
After all, what is not spent for C or G is to be “thrown into the sea” of salt water (to Thomas Malthus).
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